NEW YORK — Citigroup agreed Monday to buy Wachovia's banking operations for $2.1 billion in a deal arranged by federal regulators, making the Charlotte-based bank the latest casualty of the widening global financial crisis.
The deal greatly expands Citigroup's retail franchise, giving it a total of more than 4,300 U.S. branches and $600 billion in deposits,, and secures its place among the U.S. banking industry's Big Three, along with Bank of America Corp. and JPMorgan Chase & Co.
But it comes at a cost: Citigroup Inc. said it will slash its quarterly dividend in half to 16 cents. It also will dilute existing shareholders by selling $10 billion in common stock to shore up its capital position.
In addition to assuming $53 billion worth of debt, Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the Federal Deposit Insurance Corp. agreeing to cover any remaining losses. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.
The remainder of Wachovia will include its asset management, retail brokerage and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises. It will continue to be a public company under the Wachovia name.
The agreement comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia Corp., which was weighed down by losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.
Wachovia, like Washington Mutual Inc., which was seized by the federal government last week, was a big originator of option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed during recent months, causing big losses for the banks.
Wachovia shares, which had slumped as the global credit crisis intensified, dropped $8.20, or 82 percent, to $1.80 as trading resumed Monday afternoon. The shares had traded as high as $52.25 over the past year. Citigroup shares closed at $17.75, down $2.40 or 11.91%
The FDIC said Monday that Wachovia did not fail, and that all depositors are protected and there will be no immediate cost to the Deposit Insurance Fund.
The deal is essentially a vote of confidence in Citigroup's capital strength, said Sandler O'Neill & Partners analyst Jeff Harte in a note to investors. "We are skeptical that the FDIC would have brokered a deal to sell Wachovia's assets and liabilities into weak hands," he said.
With the acquisition of the bulk of Wachovia, Citigroup has reclaimed its title as the biggest U.S. bank by total assets — $2.91 trillion. In terms of how shareholders value each company's stock, Bank of America Corp. remains the largest U.S. bank, followed by JPMorgan Chase in second and Citigroup in third place.
Wachovia's takeover marks a dramatic shift in the outlook for Citigroup's future. Just a short time ago, the bank's investors worried about the possibility of its own collapse given its massive exposure to mortgage-backed securities. New York-based Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion.