Wachovia Is Sold As Depositors Flee

Citigroup agreed to buy Wachovia's banking operations. The deal would leave the holding company with two smaller subsidiaries, the Wachovia Securities brokerage franchise and the Evergreen Investments asset-management division. Wachovia shareholders would continue to own the holding company.

In addition to the government backstop, Citigroup said it would raise $10 billion in new capital to help it absorb Wachovia's troubled loan portfolio. Citigroup also plans to reduce by half the dividend on its widely held shares.

"This gives us a dominant franchise in great markets," said Citigroup chief executive Vikram Pandit. He described the deal as offering a rare combination of high returns and low risk because of the government's involvement.

Investors were less excited, dropping Citigroup's shares by 12 percent, or $2.40, to $17.75, on one of the worst days in recent history for the broader stock market.

The FDIC's guarantee of deposits is not preventing bank runs at Wachovia and elsewhere in part because the agency guarantees only about 63 percent of the money on deposit at the nation's banks. The rest of the money, more than $2.5 trillion, is not guaranteed because the account balances exceed the insured maximum. At the nation's largest banks, the share of insured deposits is only 56 percent.

As concerns rise about a bank's financial health, those uninsured depositors -- often small businesses -- began to withdraw money. So do investors who regularly move money around in search of the highest yields on certificates of deposit.

"It becomes a self-fulfilling prophecy," said Michael Nix of Greenwood Capital, an investment advisory firm in Greenwood, S.C. "People start hearing about problems at a particular institution, and they start taking out their money."

After Wachovia's fall, concern yesterday shifted to several regional banks with portfolios of bad loans or other financial problems. Shares of Sovereign Bancorp, based in Philadelphia, fell 72 percent. National City, based in Cleveland, fell 63 percent. Fifth Third Bancorp, based in Cincinnati, fell 44 percent.

Bair said the FDIC would continue to deal with troubled institutions as necessary. She said a large number of investors remained interested in banks. And she emphasized that depositors are not at risk. Indeed, each of the FDIC's recent deals has also protected all of the bank's uninsured deposits.

"As the markets become more skittish, financial markets are all about confidence, even the stronger institutions can be subject to traditional runs," Bair said.

"That's the challenge we have now that even the healthier institutions are becoming more susceptible," she said. "To try and maintain that confidence."

Staff writer David Cho contributed to this article.