Wachovia ($812.4 billion in assets; Charlotte, N.C.) will be acquired by New York-based Citigroup ($2.1 trillion in assets) in a deal facilitated by the FDIC. Under the agreement, Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. In exchange, Citigroup granted the FDIC $12 billion in preferred stock and warrants to compensate the agency for bearing this risk.
According to an FDIC release, Wachovia did not fail. Rather, the deal is being executed on an open bank basis with assistance from the FDIC. Citigroup will acquire the bulk of Wachovia's assets and liabilities, including five depository institutions, and assume senior and subordinated debt of Wachovia Corp. Wachovia will continue to own securities arm AG Edwards and Evergreen Investments.
According to Nancy Atkinson, a senior analyst with Boston-based Aite Group, the acquisiton will certainly provide value to the combined company. "Citi has a global physical presence that Wachovia lacks. To some extent, Citi can leverage that presence in broader markets to offset the downturn in the U.S. and Europe. On the wholesale banking side, both have strong cash management areas, while Citi's reach is clearly more global than Wachovia's. ... From a retail banking perspective, combining Citi and Wachovia gives the company the full Eastern seaboard for branch banking and deposit gathering. Citi has a much stronger credit card portfolio."
Citi's card area should not see much in the way of significant changes, claims Adil Moussa, an analyst who is also with Aite. However, he says the card companies are watching closely as this acquisition will "put another twist" in the network battle. Citi issues 20 million Visa credit cards and 80 million MasterCards, while Wachovia issues 1.5 million Visa cards.
"However, on the debit side, MasterCard can stand to win big in the future as Wachovia (a current Visa debit card issuer) issues over 12 million cards that are responsible for a total volume of $35billion," Moussa said in a statement. "This represents an opportunity for MasterCard to regain some of the ground it lost to Visa after RBS announced moving all of its debit volume to Visa and the potential change of networks from MasterCard to Visa if the WaMu's MasterCard portfolio is converted by JP Morgan Chase into a Visa one."
Payments issues aside, questions will remain as to the consequences of this assisted acquisition. The Secretary of the Treasury, on the recommendation of the Federal Reserve and FDIC, determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability.
"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits," said FDIC chairman Sheila Bair in a release. "There will be no interruption in services and bank customers should expect business as usual. This action was necessary to maintain confidence in the banking industry given current financial market conditions."