Citigroup to buy Wachovia's banking operations for $2.1 billion

September 29, 2008

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The transaction, which has been approved by the boards of both companies, is subject to approval by Wachovia's shareholders and regulators and must close by Dec. 31.

The Wachovia acquisition caps a wave of unprecedented upheaval in the financial sector in the past six months that has redefined the banking industry, starting with the government-led forced sale of Bear Stearns Cos. to JPMorgan in March.

The failure of IndyMac Bancorp in July reignited investors' fears about the stability of the financial sector, which led to the eventual takeover of struggling mortgage lenders Fannie Mae and Freddie Mac. Earlier this month, officials seized both Fannie and Freddie, temporarily putting them in a government conservatorship, replacing their chief executives and taking a financial stake in the mortgage finance companies.

After U.S. regulators made it clear that they would not bail out struggling investment bank Lehman Brothers Holdings Inc., rival Merrill Lynch & Co. arranged a hasty deal to be bought by Bank of America Corp. for $50 billion in stock.

Lehman Brothers was subsequently forced to declare bankruptcy, the largest ever in the United States. Investor concerns quickly turned to American International Group Inc., the nation's largest insurer. Staving off a failure that could have sent shock waves throughout the global markets, the federal government injected an $85 billion emergency loan into the insurer.

Just days later, the government seized Seattle-based Washington Mutual, marking the largest bank failure in U.S. history. WaMu's deposits and assets were acquired by JPMorgan for just $1.9 billion.

These events have now culminated in extraordinary moves by the federal government to try to fix the financial crisis that began more than a year ago.

Wachovia's problems stem largely from its acquisition of Golden West Financial in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs -- mostly in its mortgage business -- and slashed its dividend. Wachovia also boosted its provision for loan losses to $5.57 billion during the second quarter, up from $179 million in the year-ago period.

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