UPDATE 5-Citigroup to acquire Wachovia banking operations

A banker familiar with the deal said it has risk "in a few places," such as how the assets perform and how quickly the new businesses are integrated.

William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts, said the deal for Wachovia, the sixth-biggest U.S. bank by assets, and the European bank rescues was taking the spotlight off the bailout plan and could spook world markets.

"These announcements couldn't have worse timing because they're taking the shine off the potential bailout (in Washington)," Larkin said.

NOT AG EDWARDS

Citi would get most of Wachovia's assets, including five depository institutions, but not Wachovia Securities, the brokerage that includes the big retail brokerage AG Edwards, which it bought a year ago, or its asset-management division, Evergreen.

"We will continue as a focused leader in retail brokerage and asset management," Wachovia spokeswoman Christy Phillips-Brown said. She declined to comment on other terms of the deal.

The FDIC is backing the deal with about $312 billion in loss protection on mortgage-related and other Wachovia assets, with Citi responsible for the first $30 billion in losses.

Citi is also responsible for the next $12 billion in losses up to a maximum of $4 billion per year for the next three years. The FDIC will receive $12 billion in preferred stock and warrants from Citi and has agreed to be responsible for any further losses on the Wachovia assets.

Citi would end up with about 4,300 branches in the United States and another 3,300 elsewhere, and said it expects to close less than 5 percent of the combined branches.

It sees the deal being accretive to its earnings from the first year, excluding $3.7 billion in pretax restructuring charges for severance over the next four years, and fully accretive in 2010.

Citi said it would have had a Tier 1 capital ratio of 8.8 percent in its second quarter that ended June 30, assuming completion of the transaction.

"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," said Rose Grant, managing director of Eastern Investment Advisors in Boston. (Reporting by Christopher Kaufman/Kristina Cooke/Juan Lagorio; Editing by John Wallace/Jeffrey Benkoe)