NEW YORK (Reuters) - Citigroup Inc will buy the banking operations of Wachovia Corp in a deal assisted by the Federal Deposit Insurance Corp, the FDIC said on Monday.
Under the deal, struck in consultation with the Federal Reserve, the Treasury and President George W. Bush, depositors will be fully protected and no cost to the Deposit Insurance Fund is expected, the FDIC said.
“Wachovia did not fail; rather, it is to be acquired by Citigroup Inc on an open bank basis with assistance from the FDIC,” a statement on the FDIC’s website said.
Shares of Wachovia tumbled more than 80 percent in pre-market trading to below $2 per share. Citibank shares were up about 3 percent to $20.54.
Earlier, The New York Times had reported that Citigroup and Wells Fargo were looking at Wachovia and that neither was likely to bid more than a few dollars a share for the sixth-largest U.S. bank by assets.
Citigroup will buy the bulk of Wachovia, including five depository institutions, and assume its senior and subordinated debt. Wachovia will retain ownership of its retail brokerage unit, AG Edwards, and its assets-management division, Evergreen.
The FDIC said it would share losses with Citi on a pre-identified pool of Wachovia loans.
“The FDIC has entered into a loss-sharing arrangement on a pre-identified pool of loans,” the agency said. “Under the agreement, Citigroup Inc will absorb up to $42 billion of losses on a $312 billion pool of loans.
“The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.”
Investor concern about Wachovia intensified on Friday after JPMorgan said it would take a $31 billion write-down on loans it acquired when it took over Washington Mutual Inc’s banking unit on Thursday.
Reporting by Christopher Kaufman/Kristina Cooke/Juan Lagorio; Editing by John Wallace