Wachovia is the next big bank to fall and it’s banking assets have been acquired by Citi. Under the terms of the agreement, Citi will pay Wachovia approximately $2.16 billion in stock and assume Wachovia’s senior and subordinated debt, totaling approximately $53 billion. This will create a U.S. retail bank with 9.8% U.S. market deposit share, and total deposits globally of $1.3 trillion.

The transaction was facilitated by the Federal Deposit Insurance Corporation and concurred with by the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. FDIC stressed in the press release though that Wachovia had not “failed” but was rather “acquired”

The highlights of the agreement are

1. Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp.
2. Wachovia Corporation will continue to own AG Edwards and Evergreen.
3. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that.
4. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

“On the whole, the commercial banking system in the United States remains well capitalized. This morning’s decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury,” FDIC Chairman Sheila C. Bair said. “This action was necessary to maintain confidence in the banking industry given current financial market conditions.”

Citi plans to raise $10 billion in common equity and reduce quarterly dividend to 16 cents per share to maintain strong capital position after the transaction.

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