The remainder of Wachovia will include its asset management, retail brokerage and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises. It will continue to be a public company under the Wachovia name.
The agreement comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia Corp., which was weighed down by losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.
Wachovia, like Washington Mutual Inc., which was seized by the federal government last week, was a big originator of option adjustable-rate mortgages, which offered 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.
Wachovia shares, which had slumped as the global credit crisis intensified in recent months, dropped $8.20, or 82 percent, to $1.80 as trading resumed Monday afternoon. They had traded as high as $52.25 over the past year.
The FDIC asserted Monday that Wachovia did not fail, and that all depositors are protected and there will be no immediate cost to the Deposit Insurance Fund.
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 said in a statement that the sale of Wachovia's banking operations to Citigroup would "mitigate potential market disruptions." Paulson said he agreed with the FDIC and the Fed that a "failure of Wachovia would have posed a systemic risk" to the nation's financial system.
The deal is essentially a vote of confidence in Citigroup's capital strength, said Sandler O'Neill & Partners analyst Jeff Harte in a note to investors. "We are skeptical that the FDIC would have brokered a deal to sell Wachovia's assets and liabilities into weak hands," he said.
With the acquisition of the bulk of Wachovia, Citigroup has reclaimed its title as the biggest U.S. bank by total assets -- $2.91 trillion. In terms of how shareholders value each company's stock, Bank of America Corp. remains the largest U.S. bank, followed by JPMorgan Chase in second and Citigroup in third place.
Wachovia's takeover marks a dramatic shift in the outlook for Citigroup's future. Just a short time ago, the bank's investors worried about the possibility of its own collapse given its massive exposure to mortgage-backed securities. New York-based Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the largest reduction in asset values taken by any U.S. bank in the current credit crisis.
Citigroup said it expects to reduce expenses by more than $3 billion annually as it consolidates certain functions. But with few overlaps in their regional operations, Citi projects closing fewer than 5 percent of the banks' combined branches.
During a conference call with investors, Citigroup CEO Vikram Pandit said he is working with Wachovia CEO Bob Steel in setting up a transition team. "We will make sure that we execute on this with a great deal of precision and a great deal of speed," he said.
The failure of the government's proposed $700 billion rescue plan for financial institutions casts doubt on whether Citigroup will be able to rid itself of some of Wachovia's bad debt. Some expected the bank to take advantage of the plan and potentially sell toxic mortgages and other assets it gained from Wachovia for a higher price than the bank actually paid for them.
But House lawmakers voted down the bailout proposal on Monday afternoon.