FDIC shares risk in Wachovia buyout
Upstaged by the bailout vote and the stock market fall, news that Citigroup is buying Wachovia got far less attention that it would have on a normal news day. But Jeremy Hobson gathered up the details.
A Wachovia sign in Atlanta. (Erik S. Lesser/Newsmakers)
More on The Economy, Wall Street, Politics, Fed. Budget/Govt. Spending, America's Financial Crisis
TEXT OF STORY
Kai Ryssdal: I can pretty much guarantee you that on most any other day this next item would've been the top story. One of the biggest banks in the country, Wachovia, has sold itself to Citigroup, which, as it happens, is the biggest bank in the country in terms of assets.
As has been the pattern for the past month or so, there were intense negotiations over the weekend. Citi will pay just over $2 billion -- that's about a dollar a share -- for Wachovia, a stock that was worth about $10 a share on Friday. It's a bargain basement price, but should the buyer beware? Marketplace's Jeremy Hobson reports from New York.
Jeremy Hobson: Typically when banks buy each other, they do so privately. But typically doesn't apply anymore. Karen Petrou is managing partner at Federal Financial Analytics.
Karen Petrou: This is not a private sector transaction. This is a government rescue.
In order to get Citi to buy Wachovia, the FDIC promised to shoulder most of the potential losses. There are a lot of them. Wachovia purchased a California lender in 2006, which was riddled with bad mortgages. That's added to what is now $312 billion in loans on Wachovia's balance sheet.
Petrou: Citi is at risk for only $42 billion of that portfolio. The rest of the $312 (billion) goes to the FDIC.
In exchange the FDIC will get $12 billion worth of Citi preferred stock and warrants. Petrou says guaranteeing that Wachovia debt was a risk the FDIC felt it had to take. Especially, she says, after Wachovia customers started pulling their money out of the bank late last week.
Petrou: It confronted a lot of extraordinarily unappealing choices and picked the one it believes was the least-cost resolution.
And on paper, it certainly looks like a good deal for Citi, says Anant Sundaram, finance professor at Dartmouth's business school. But he says putting two cash-strapped banks together doesn't guarantee the survival of either one.
Anant Sundaram: What does this combination achieve for systemic risk in the system that these two being separate could not have? The honest answer has to be it is not clear.
Sundaram says the speed at which the deal came together didn't help. He wonders whether Citi had adequate time to assess the risks it will soon own.
In New York, I'm Jeremy Hobson for Marketplace.
Comments
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From Richmond, VA, 09/30/2008
What a generous and reckless guy FDIC is. He only has about 42 billion dollars in his pocket, but he dares to insure 4500 billion deposits of American people. In this one specific deal, he has to face 312 billion problematic debt of Wachovia. In term of total assets or funded reserve, FDIC is apparently much smaller than AIG. When AIG already failed, what will be the fate of FDIC? Of course they are different from each other in that FDIC is 100% sure backed by congress and by taxpayers. Even if the congress rejected that 700 billion robbing from taxpayers, FDIC will still pull every one of us into this financial swamp. It seems that the 700 billion bail-out bill will not only rescue each American family, but also rescue the government’s face, because if they don’t do it, they will have to cut another bigger check from Treasury to rescue FDIC. This is the untold part of the story.
From Mesa, AZ, 09/29/2008
Oops! I sure sounds like the FDIC and Citi had assumed that the bailout was a done deal, and that they would be at the head of the line to unload thier bad CDOs and SIVs on the FED. Unless a bailout gets passed, somebody is going to find out what happens when you assume. As I have been for the last two years, I still seem the DOW hitting bottom at 9,796, with several years to claw it's way back above 11,000.
09/29/2008
So instead of a $700 billion USD bailout happening, there was a $270 billion USD bailout. Does anyone still think that the Gov't would stop at $700B? If that bailout plan had been passed we would be on the hook for well over a trillion dollars. As it stands we're still going to be in trouble if FDIC keeps grabbing risky debt like this.
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