Wachovia Is Sold As Depositors Flee

By Binyamin Appelbaum
Washington Post Staff Writer
Tuesday, September 30, 2008

The sale of Wachovia's banking business to Citigroup yesterday marked the second time in five days that a major U.S. bank was forced from existence in part by fleeing depositors, raising serious questions about the stability of other financial firms and the health of the banking system.

The deal also continues the rapid consolidation of an industry that has long been kept fragmented as a matter of public policy but now is being encouraged by the government to conglomerate.

In the latest rescue urged by federal regulators, Citigroup agreed to pay $2.16 billion for Wachovia, the nation's third-largest retail and commercial banking franchise. Wachovia was fast-growing and widely admired, run by Treasury Secretary Henry M. Paulson Jr.'s former deputy Robert Steel. Citigroup is a long-standing colossus of the American financial services industry.

Citigroup, based in New York, would become the largest bank in the Washington area. The deal would protect all deposits at Wachovia, according to a statement from the Federal Deposit Insurance Corp., which presided over the companies' shotgun wedding.

To consummate the deal, the FDIC promised to limit Citigroup's losses on a $312 billion portfolio of Wachovia's most troubled loans. The government agreed to absorb all losses beyond $42 billion, a threshold that could be exceeded based on the performance of similar groups of mortgage loans at other banks.

In exchange, the government would get a $12 billion stake in Citigroup, making it one of the largest shareholders in what would be the nation's largest bank. Sheila C. Bair, chairman of the FDIC, said the government's involvement was necessary "to maintain confidence in the banking industry given current financial-market conditions."

Citigroup will join Bank of America and J.P. Morgan Chase in a small group of giants that have emerged from the crisis to dominate American banking. The three companies together would hold more than 30 percent of the nation's deposits. They would hold more than 40 percent of bank loans to corporations. They would be the issuers of more than 50 percent of the nation's credit cards. And they would each number among the five largest investment banks.

The banking industry was fragmented by the government during the Great Depression and kept that way for most of a century, to promote competition, reduce prices and keep any one company from becoming too central to the health of the economy. Now those efforts have been upturned in the space of a frantic month.

Federal regulators said that they encouraged the consolidation because the alternative was a systemic collapse and that they will consider the ramifications once the crisis is resolved.

Critics, however, said that regulators, in attempting to fix the banking system, are repeating the same mistakes they made in allowing the crisis to spin out of control: They are ignoring the long-term interests of consumers and of the economy.

"I think we've learned in this crisis that there's a connection between making sure that customers are not abused and ensuring that banks can continue to earn profits," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer advocacy group. "Ignoring those consumer protections is what got us into trouble in the first place."

Some analysts also question how the government will regulate companies with which it is increasingly intertwined. The government has helped to decide which banks will acquire fallen rivals. It has backstopped some of those deals with federal money, and it now owns a stake in Citigroup.

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