In a move that could have substantial economic impact for the region, Charlotte’s second largest bank is sold to Citigroup, further adding to financial market woes
We never thought it would come to this, despite the dire predictions and gloomy forecasts.
Wachovia Corp., the region’s second-largest bank behind Bank of America and once a pillar of financial strength in the Southeast, agreed to sell its retail and commercial operations to Citigroup Inc.
Wachovia, which will remain a public company with two main subsidiaries (Wachovia Securities and Evergreen Asset Management), saw its stock plunge from $10 a share to less than $1 a share as investors cut their losses.
The bank’s vulnerability in the end was stunning. Citigroup was forced to absorb $42 billion in losses. The FDIC, acting on behalf of depositors and funded by taxpayers, was forced to back any other losses from Wachovia’s $312 billion loan portfolio.
Fortunately, the FDIC negotiated $12 billion in preferred Citigroup stock and warrants as part of the deal.
The FDIC said Wachovia was not on the verge of collapse and indicated no money from the insurance reserve was used to close the transition.
Nevertheless, taxpayers are exhausted. The feds were forced to seize Washington Mutual last week. A bailout plan for Washington to clear Wall Street of toxic mortgage loans was derailed in Congress after a public revolt.
Treasury Secretary Henry Paulson hinted dire consequences were ahead for Wachovia without a merger or takeover, saying “failure of Wachovia would have posed a systemic risk” to the nation’s financial system.
Citigroup’s acquisition is not good news for 20,000 Wachovia employees in the region. Citigroup said in a statement it will save “more than $3 billion of annualized expense synergies through the consolidation of overlapping functions.”
Translation: Layoffs likely will be imminent after the sale closes by year’s end. Early projections suggest up to 5,000 employees in the region could lose their jobs in the acquisition.
Just last summer, Wachovia cut 11,350 jobs from its nationwide work force of 120,000. The bank acted after posting a $9 billion loss, mostly from bad loans.
The Wachovia deal and Washington Mutual failure were on Congress’ mind as it considered a bailout of Wall Street on Monday.
Instability continues to create concern. Congress must find a way to relieve credit markets and stabilize the banking system.
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