Tuesday, 30 September 2008

Citi Picks the Eyes out of Wachovia

Wachovia has been teetering on the brink for a while so it was hardly surprising to see them finally topple over. Although they are not entirely out of business....at least not yet, they are still left with a brokerage and funds management outfit. From Bloomberg:

Citigroup Agrees to Buy Wachovia's Banking Business

Citigroup Inc., the biggest U.S. bank by assets, will acquire banking operations of Wachovia Corp. for about $2.16 billion after shares of the North Carolina lender collapsed under the weight of overdue mortgages.

The all-stock deal equals about $1 a share for the Charlotte-based bank, ranked sixth by assets in the U.S. All depositors will be protected, according to the Federal Deposit Insurance Corp., which helped broker the takeover by Citigroup. The New York-based bank plans to cut its own dividend in half and raise $10 billion in capital as it takes on Wachovia's senior and subordinated debt.

Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in a statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.

"This is a compelling deal," said Citigroup CEO Vikram Pandit, 51, on a conference call with analysts and investors. "This is one of those rare high-return acquisitions in which we have contained the risks."

Well Pandit would say that wouldn't he? However Meredith Whitney was a little more skeptical.

"Of course they are going to raise capital,'' Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC. "I don't know how they absorb $42 billion on the income basis they have."

That's what I don't understand. Citigroup are up to their necks in the brown stuff themselves and I bet they weren't counting on the bailout plan being rejected today.

....Wachovia is the largest holder of option ARMs, ahead of Washington Mutual, the Seattle-based lender that collapsed last week. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41percent from year-earlier levels....

....Analysts at Fitch Ratings predict default rates on such loans packaged as securities may reach percent.

Was Citi hoping to dump some of these assets into the governemnt bailout plan? Pandit probably won;t be sleeping well tonight. So who's next? Keep an eye on National City (NCC)