- The Washington Times - Tuesday, September 30, 2008

In the continuing upheaval of the financial industry, Citigroup, the nation’s largest bank, paid $2.1 billion in stock Monday to acquire Wachovia Corp., whose share price has been collapsing following the bursting of the housing bubble.

Citigroup, a financial conglomerate that has been forced in recent months to write down nearly $50 billion in toxic, mostly mortgage-related assets, will assume $53 billion in debt owed by Wachovia, the nation’s sixth-largest bank in terms of assets.

The deal was worked out with the concurrence of the Federal Reserve and the U.S. Treasury. The Federal Deposit Insurance Corp. facilitated Citigroup’s takeover of Wachovia, whose balance sheet includes $488 billion in loans and $448 billion in deposits.

“As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy,” said Treasury Secretary Henry M. Paulson Jr.

Under the terms of the takeover agreement, Citigroup will absorb up to $42 billion in losses from a pre-identified $312 billion pool of loans. The FDIC will absorb losses beyond that. To compensate the FDIC for bearing this risk, Citigroup has granted the FDIC $12 billion in preferred stock and warrants. Citigroup, which has lost more than $17 billion during the past three quarters, has agreed to raise $10 billion in additional capital and reduce its dividend to 16 cents a share.

“This action was necessary to maintain confidence in the banking industry, given current financial-market conditions,” FDIC Chairman Sheila Bair said in a statement.

In one of the most ill-timed, ill-conceived takeovers in the history of business, Wachovia paid $24 billion in August 2006 to acquire California-based Golden West Financial Corp., which specialized in option-payment adjustable-rate mortgages, known as option ARMs.

California real estate prices soared during the first six years of this decade and peaked during the summer of 2006, having become unaffordable for many homebuyers long before then. Those buyers financed their purchases with option ARMs, which frequently included low teaser rates and allowed homeowners the option of making payments well below the amount due. The difference was added to the balance of the mortgage.

After interest rates reset and home prices plunged, homeowners not only faced much higher mortgage payments, but often found themselves owing far more on their mortgages than the homes were worth. They defaulted in droves, foreclosures soared and the loan portfolio that Wachovia purchased from Golden West suffered continuous writedowns, which are ongoing. Home prices in California last month had fallen more than 40 percent from a year ago.

With about $122 billion in ARMs in its loan portfolio, Wachovia is now the largest holder of option ARMs. Washington Mutual, the nations’s largest thrift, which was seized last Thursday by the FDIC and sold to JPMorgan Chase, held $53 billion in option ARMs in its portfolio.

Shortly before Wachovia purchased Golden West, Wachovia’s stock fetched $60 a share. It closed last Friday at $10 per share before losing virtually all of its value over the weekend as the takeover was engineered.

Wachovia has become the latest victim of a financial crisis that erupted last August when subprime mortgages imploded. In March the government forced Bear Stearns, whose stock sold for $150 a year earlier, into the arms of JPMorgan Chase for $10 a share. Earlier this month, the federal government took over mortgage-finance giants Fannie Mae and Freddie Mac. Lehman Brothers was then allowed to go bankrupt, while Merrill Lynch sold itself to Bank of America. Several days later, the government effectively took over American International Group, the nation’s largest insurance company. Last Thursday, the FDIC took over Washington Mutual and sold it to JPMorgan Chase. Yesterday, it was Wachovia’s turn to meet the Grim Reaper.

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