In a deal facilitated by the Federal Deposit Insurance Corp., Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, and the FDIC will cover any remaining losses, the government agency said Monday. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.
The deal comes at a cost, however. Citigroup said Monday it will seek to sell $10 billion in common stock and slashed its quarterly dividend in half to 16 cents to shore up its capital position.
Wachovia, like Washington Mutual, which was seized by the federal government last week, was a big originator of adjustable-rate mortgages, which offer very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.
Federal Reserve Chairman Ben Bernanke, in a statement Monday, said he supports the "timely actions" taken by the FDIC, "which demonstrate our government's unwavering commitment to financial and economic stability."
Treasury Secretary Henry Paulson also welcomed the sale of Wachovia to Citigroup, saying it would "mitigate potential market disruptions."
Now that a deal for Wachovia is complete, the most troubled of the nation's largest financial institutions have been dealt with. However, the FDIC estimated there were 117 banks and thrifts in trouble during the second quarter, the highest level since 2003. And that number is likely to have increased during the third quarter.
With the acquisition of Wachovia, Citigroup has assets of $2.91 trillion, more than any other U.S. bank.
In terms of current market capitalization, Bank of America remains the largest U.S. bank, followed by JPMorgan Chase in second and Citigroup in third.
As details of its takeover unfolded, Wachovia shares plunged 91 percent to 94 cents. The stock had closed Friday at $10, down 74 percent for the year.
This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs 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.