Financial services major Citigroup will acquire the banking operations of Wachovia, the fourth largest bank of the US, in a deal facilitated by the American regulators.
Citi would absorb up to $42 billion on $312 billion of losses of loans, the Federal Deposit Insurance Corporation (FDIC) said in a statement on Monday.
The FDIC has entered into loss-sharing arrangement on a pre-identified pool of loans.
According to the statement, the FDIC would absorb losses beyond that. "Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk."
As part of the transaction, Citi, led by India-born CEO Vikram Pandit, would acquire the bulk of Wachovia's assets and liabilities, including five depository institutions and also assume senior and subordinated debt of the country's fourth largest bank.
Wachovia is the latest American financial institution to sell its operations in the ongoing credit crisis, which has seen the collapse of giants like Lehman Brothers and the firesale of Merrill Lynch to Bank of America.
"I commend the action taken by Chairman Bair and FDIC today to facilitate the sale of Wachovia Bank to Citigroup in an orderly fashion to mitigate potential market disruptions. I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk," US Treasury Secretary Henry Paulson said.
In consultation with the American President George Bush, the Treasury Secretary on the recommendation of the Federal Reserve and FDIC determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability, the statement added.
