Wachovia is the only national bank in the small southern town where the college I went to is located. My wife and I both banked there when we were undergrads. Even though we do not bank there anymore, I was still blown away yesterday when I read about Citigroup’s takeover of the troubled bank. It seems that the current financial crisis is touching everyone in some way.
Citigroup agreed to purchase Wachovia’s banking operations for $2.1 billion in an all stock deal today. The combination of Citigroup and Wachovia will make the united entity the nation’s third largest bank behind Bank of America Corp. and JPMorgan Chase and Company. Citigroup’s retail banking network will now have more than 4,300 U.S. branches and over $600 billion in deposits.
Negative Impacts. The rescue of Wachovia did not come without a price for Citigroup and its investors. Citigroup will now be forced to slash its quarterly dividend in half to 16 cents per share and will dilute its existing shareholders by issuing $10 billion in new common stock to raise capital. Citigroup will also issue preferred stock and convertible warrants to the FDIC. Citibank will assume $53 billion worth of Wachovia’s debt and absorb up to $42 billion of losses from Wachovia’s $312 billion loan portfolio. Although the FDIC’s insurance was not initially used, the American taxpayers may still be on the hook for additional loses above these levels.
Not Out of the Woods Yet. It is amazing that Citigroup could put together a deal for Wachovia and outbid Wells Fargo for the troubled bank. Recently, there were worries on Wall Street about Citigroup’s own financial health. Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion after writing down bad debt by about $46 billion. That’s the largest reduction in asset values taken by any U.S. bank in the current credit crisis according to the Associated Press.
There are approximately 8,000 different banks and credit unions throughout the United States. I have a feeling that we may not have seen the last of the combining of banks and assets. When this year ends, there will be a vastly different banking environment for the American people.