Wachovia: The De Facto Biggest Banking Failure Ever?

Wachovia (WB) is effectively the nation’s largest failed bank ever as their banking operations were sold to Citigroup (C) this morning in a deal orchestrated by the FDIC:

From The WSJ:

Citigroup Inc. agreed to acquire Wachovia Corp.’s banking operations on Monday for $2.1 billion in stock and will assume another $53 billion in Wachovia debt. Federal banking regulators pushed the deal by agreeing to share a portion of future losses that Wachovia’s failing mortgage portfolio could generate.

Citi’s purchase of the fabled Charlotte bank marks another deal orchestrated by the federal government, this time by the Federal Deposit Insurance Corporation, and one in which the agency could be on the hook for loan losses.

“The FDIC has agreed to provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets,” Citigroup said in a statement.

The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies…

…The FDIC said the deal was reached in concurrence with it, the Federal Reserve Board and the U.S. Treasury Department. “There will be no interruption in services, and bank customers should expect business as usual,” FDIC Chairwoman Sheila Bair said.

In a separate statement, Fed Chairman Ben Bernanke said he welcomes the Wachovia bailout deal and supports the timely actions taken by the FDIC. He added that the FDIC action shows the government is committed to U.S. financial stability.

The FDIC sought to calm any concerns the Citigroup and Wachovia deal might have on financial markets.

“On the whole, the commercial banking system in the U.S. remains well capitalized,” Ms. Bair said. “This morning’s decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury.”

The FDIC said the move was necessary to “avoid serious adverse effects on economic conditions and financial stability.”

For Citigroup, it is a rapid transformation from one of Wall Street’s biggest losers to a “pillar of strength,” as top executives began calling the company earlier this month, and a testament to the torment sweeping the banking sector.

Over the past year, Citigroup has racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown. The company was a leader in creating and marketing some of the exotic securities that have been at the heart of the credit crunch. Its stock price has shriveled to less than $20, compared to more than $50 early last summer.

Citigroup is buying what the FDIC said is “the bulk of” Wachovia’s assets and liabilities, including five depository institutions, and assumes the company’s senior and subordinated debt. Not being sold are the A.G. Edwards brokerage division and Evergreen Investments operations.

The FDIC also has entered into a loss-sharing arrangement on a pre-identified pool of loans under which Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, with the FDIC covering anything beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing the risk.”

While not a “true banking failure” per se, it really should be considered as one due to the fact that what the FDIC did was orchestrate (and backstop, contribute to, et al) the sale of Wachovia to Citibank before they were forced to shut the bank down. In other words the only difference between the WAMU failure last week and the Wachovia “sale” today is a couple of hours, and/or the fact that Wachovia was sold before it “officially” failed.

Either way the fact that two major national banks have failed within the course of 3 business days is truly mind boggling, a year ago these were major national banks with aggregate market caps topping 9 figures and now they’re being sold off for a fraction of their former value.

Another mind boggling component about the entire situation is that not too long ago people were whispering things about Citibank having major issues, needing to be sold and/or broken up, etc, and now here they are rescuing another flailing financial institution.

Considering the size of Citibank (and Wachovia for that matter) I’m assuming the rules around no bank being allowed to have more than 10% of the nation’s deposits via a buyout have been thrown out the window, because I’m not sure of the exact percentages at play here it’s not a stretch to hypothesize that Citibank is over that limit now.

Aside from the usual thoughts around the banking environment having changed dramatically over the past three weeks consider this one instead: as a result of the failures, consolidation, et al of the past nine months one could argue that the U.S. banking environment is more risk laden as we have significantly fewer players being controlled by a smaller number of people.

You can read more here.

Sources:

The WSJ: “Citigroup to Acquire Wachovia Assets” — Marshall Eckblad, September 29, 2008 .

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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Comment by John

2008-09-29 17:34:13

The FDIC stressed that WB was NOT a failure. This was DEFINITELY a failure.

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Comment by Kiwi

2008-09-29 17:35:09

FDIC’s agreement to provide future loss protection on $312 billion risk has to be taken with a huge grain of salt given that Congress would probably have to vote the money thru when the time comes. The Fed is effectively bankrupt already yes? Window dressing, smoke and mirrors, zero confidence, white man speak with forked tongue. Congress has yet to pass the suspension of mtm on which this magic trick may depend. Sorry but this looks as inspiring as a shell game.

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