Monday, September 29, 2008

Citigroup Rescues Wachovia's Bank Unit as Stock Spirals Down

Is Bank of America Next with Billions in Careless ARMs, Bad Loans Hanging Over It? Citigroup Inc., the biggest U.S. bank by assets, will pay about $2.16 billion for banking operations of Wachovia Corp. after shares of the North Carolina lender collapsed under the weight of overdue mortgages.

While regulators said the Charlotte-based bank hadn't failed, Wachovia will lose its biggest unit and investors will get only about $1 a share for the bank, whose stock topped $59 in April 2006. All depositors will be protected, according to the Federal Deposit Insurance Corp., which helped broker the takeover by Citigroup.

Wachovia agreed to the stock-swap transaction just hours before the U.S. House of Representatives planned to vote on a $700 billion bank industry bailout. The package - which lawmakers rejected in an afternoon vote - was aimed at stopping the credit crunch that drove Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos.

"The problem must have occurred last week with their ability to continue to attract and hold deposits after the failure of Washington Mutual,'' Gary Townsend of Hill-Townsend Capital in Chevy Chase, Maryland, said of Wachovia. "On Thursday and Friday they must have had a large run on the bank.''

Wachovia's stock, which finished last week at $10 on the New York Stock Exchange, traded for $1.84 in 4:15 p.m. transactions, a loss of 82 percent for the day. It plummeted 83 percent in the past two years through last week. Citigroup fell 12 percent to $17.75 today.

Insiders say: Don't believe the BS on the Wachovia website
about a seamless transition and transfer of assets or
that the Wachovia-Citi deal is a sale and not a bank failure.
NOT SO - It is a rescue before an impending failure.
Additionally, "there are thousands and thousands of
operations personnel working around the clock and
mistakes are happening as we speak."
Citigroup's Role

Wachovia will continue to own its securities brokerage unit, the Evergreen mutual-fund family and insurance and retirement businesses. The brokerage has about 14,600 financial advisers and more than $1 trillion under management, making it third in the U.S. behind Merrill Lynch and Citigroup's Smith Barney unit.

The purchase gives New York-based Citigroup about 3,300 more branches and offices in 21 states. The combined company will have about 4,300 U.S. bank offices and more than $600 billion in deposits for a 9.8 percent share of the U.S. banking market. Citigroup's total deposits globally will be $1.3 trillion, the bank said, or about $350 billion more than JPMorgan Chase & Co.

Citigroup plans to cut its own dividend in half and raise $10 billion in capital as it takes on Wachovia's senior and subordinated debt. Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in a statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.

Steel's Tenure

The transaction is a blow to Wachovia Chief Executive Officer Robert Steel, 57, who was recruited from the Treasury department in July to rebuild the lender's credibility with investors. He bought 1 million shares of Wachovia stock for about $16 million two weeks after arriving at the company.

Steel wasn't available for comment beyond a prepared statement in which he called Citigroup "a strong partner to preserve the stability and quality of our banking franchise.'' Calls to Lanty Smith, chairman of Wachovia's board of directors, wasn't immediately returned.

"This is a compelling deal,'' said Citigroup CEO Vikram Pandit, 51, on a conference call with analysts and investors. "This is one of those rare high-return acquisitions in which we have contained the risks.

'' Wells Fargo & Co. had also bid for Wachovia, according to the Wall Street Journal.

'Citi Needed It'

"Citi needed it more than anybody,'' said Nancy Bush, an independent bank analyst. "It would have been nice for Wells, but I couldn't see them taking on that chunk of bad debt.

'' The FDIC said it won't have to tap its insurance fund, something the agency also avoided in the WaMu failure last week. Keeping the FDIC's fund healthy has been a priority for U.S. regulators because its $100,000 insurance on deposits keeps depositors from panicking when a bank's health is questioned.

Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC there was ``no doubt'' in her mind that there had been a run on Wachovia. Steel sent a memo to the staff last week affirming that the company was sound and more diversified than Washington Mutual after that lender failed. The memo, according to a copy obtained by Bloomberg, included a set of questions and answers for employees who might have to answer queries from worried customers, such as "Does all the recent news put Wachovia at risk?'' and "How is Wachovia different'' from Lehman, Bear Stearns and WaMu.

'Silent' Run

Louise Pitt, a credit analyst at Goldman Sachs Group Inc., wrote Friday that Wachovia may have been facing the possibility of a "silent'' run on deposits, in which customers fearful of a bank failure withdraw their money in unusually large numbers. WaMu became "unsound'' after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said when it seized WaMu on Sept. 25. The FDIC and Wachovia didn't say today whether the bank suffered similar withdrawals. Wachovia reported $9.7 billion of losses in the first half of 2008. The slide toward collapse began when the bank paid more than $24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $122 billion of the adjustable- rate home loans. Kennedy Thompson, the chief executive officer at the time, later admitted that the purchase at the height of the real estate boom was ill-timed.

Option ARMS

Wachovia was the largest holder of option ARMs, ahead of Seattle-based Washington Mutual until it collapsed. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41 percent from year-earlier levels. Pressure on the bank to make a deal grew last week when JPMorgan Chief Executive Officer Jamie Dimon bought WaMu and then announced writedowns on loans similar to those held by Wachovia. "Jamie Dimon threw gas on the fire when JPMorgan built in losses of 25 percent on the Washington Mutual option ARMs,'' Bush said yesterday. Steel "has put his losses at 12 percent, but that was a couple of weeks ago and the situation has gotten more dire since then.'' Analysts at Fitch Ratings predict default rates on such loans packaged as securities may reach 45 percent. "Bob Steel missed the opportunity to raise more equity,'' Townsend said. "What we heard from him from the beginning is that they didn't need to raise more equity. That clearly wasn't the case.'


Wachovia's `Great Success' Became $122 Billion Burden

Sources: WSJ, Flower, Leer Financial

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