Citigroup Buys Wachovia

While Congress started debate on the financial bail out legislation, Citigroup announced that it was buying Wachovia for $2.2 billion in an all stock deal. The Federal Deposit Insurance Corporation said Wachovia hadn’t failed, but it was just a matter of time. Treasury Secretary Henry Paulson said, “A failure of Wachovia would have posed a systemic risk.”

The AP reported, “Citigroup will absorb up to $42 billion of losses from Wachovia’s $312 billion loan portfolio, with the FDIC covering any remaining losses, the government agency said Monday. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.” Wachovia will remain a publicly traded company, and it will retain its brokerage business.

The wire service also said, ‘Wachovia’s problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion at the height of the nation’s housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West’s specialty, which let borrowers skip some payments.

“This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs — mostly in its mortgage business — and slashed its dividend. Wachovia also boosted its provision for loan losses to $5.57 billion during the second quarter, up from $179 million in the year-ago period.”

Rose Grant, managing director of Eastern Investment Advisors in Boston, noted, “One thing that Citigroup has been wanting to do for a while is to expand its retail operations because they are in very limited areas, so this would basically allow them to do that.” The lesson is that cask is king right now, and those with the cash are going to be well-positioned to profit in the coming months. Citigroup and Wells Fargo are the two best-funded banks in America, and they are likely to continue buying up failing banks as the bail out legislation will let them off-load the more toxic investments on the target bank’s books.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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