|Note in the following WSJ article that WFC's original offer for WB was **$20** billion [C got it for $2 billion] before WFC suddenly took it's offer off the table Sunday night:|
SEPTEMBER 30, 2008
Citi, U.S. Rescue Wachovia
Latest Shotgun Deal Creates Nation's Third-Largest BankBy DAVID ENRICH and MATTHEW KARNITSCHNIGArticle
Citigroup Inc. acquired most of Wachovia Corp. for nearly $2 billion in a government-engineered takeover that shows how quickly once-mighty U.S. banks are succumbing to a growing mountain of bad mortgages and other loans.
Wachovia's deal with Citigroup was pushed by federal banking regulators and welcomed by the Fed.
Wachovia wasn't doomed by the same sort of customer exodus that led regulators to seize Washington Mutual Inc.'s banking operations last week. But federal officials intervened before dawn Monday after concluding that the Charlotte, N.C., bank's deteriorating condition posed a threat to the already fragile U.S. financial system.
As part of the deal, Citigroup will inherit a $312 billion mortgage portfolio saddled with bruising losses. Citigroup's future losses on those loans will be capped at $42 billion, with the government agreeing to absorb any additional losses. In return, the government got $12 billion worth of warrants for Citigroup stock and preferred shares.
The takeover was hammered out in frenetic negotiations that lasted all weekend. The immediate catalyst was that major credit agencies were poised to cut Wachovia's ratings, just as the bank had billions of dollars in debt coming due this week.
Wells Fargo & Co. initially said it was prepared to buy Wachovia for more than $20 billion and wouldn't require any government assistance, according to people familiar with the talks. Late Sunday, the San Francisco bank abruptly changed its mind. That set in motion a desperate scramble through the night that ended with the government presiding over Wachovia's shotgun marriage to Citigroup early Monday morning.
Citigroup's transformation from one of the financial system's biggest losers just six months ago into what Citigroup executives now call "a pillar of strength" shows how quickly the pecking order among U.S. banks is being upended by the headlong rush to cull the industry of its weakest institutions.
Vikram Pandit, who took over at Citigroup in December, has told colleagues in recent days that he doesn't want Citigroup to be "too long the U.S. consumer" and prides himself on the company's geographic diversity. With his decision to pounce on wounded Wachovia, Mr. Pandit is now betting on the resilience of America's consumer-driven economy.
Over the past year, Citigroup has been clobbered by more than $40 billion in write-downs and other losses stemming from its exposure to rapidly devaluing securities. Late last year, Citigroup was so weakened that it was seen as a takeover target, even fielding a merger feeler from a representative of Bank of America Corp. Its stock price has fallen by more than half since the financial crisis erupted in summer 2007.
Citigroup is still struggling. Chief Financial Officer Gary Crittenden said Monday that the company is facing a third-quarter net loss of up to $5 billion, its fourth straight quarter in the red. That includes up to $10 billion in losses tied to consumer loans such as mortgages and credit cards.
Standard & Poor's and Moody's Investors Service warned Monday that they may slice their ratings on Citigroup's debt due to continued risks associated with the company's holdings of troubled loans and other assets, as well as challenges with integrating Wachovia. Ratings downgrades could boost how much Citigroup has to pay to borrow money.
Citigroup executives hope that the Wachovia deal will strengthen the company by improving its access to deposits, which are a stable source of low-cost funding. The deal will roughly triple the size of Citigroup's U.S. retail-banking business. The combined bank's 4,300 branches will trail only Bank of America and J.P. Morgan Chase & Co.
Still, Citigroup risks biting off more than it can chew. To finance the Wachovia purchase, Citigroup is issuing $10 billion in new stock and is lowering its dividend for the second time this year.
Plus, Mr. Pandit and his new executive team are largely untested in retail banking and have their hands full with turning around the company's sluggish operations. Mr. Pandit voiced confidence in Citigroup's ability to digest Wachovia. "Nothing is going to take our eye off the ball on getting fit," he said Monday.
Despite its problems, Citigroup's diverse mix of businesses and deep well of international deposits have allowed it to dodge the bullets that have felled Lehman Brothers Holdings Inc., American International Group Inc., Washington Mutual and, now, Wachovia.
Interviews with executives, advisers and government officials who were involved on all sides of Wachovia's talks to sell itself shed light on the bank's final hours.
Storm of Fear Enveloped WachoviaWachovia's Hometown Faces Identity CrisisWachovia Bargain Turns Into HeartacheWhat Wachovia Customers Need to KnowDeal Journal: The Citi conference callStatements: Citigroup | FDICA Looming Makeover for U.S. BankingGovernments Agree to Rescue FortisLehman in Deal to Sell Neuberger BermanHow J.P. Morgan Raised $11.5 Billion in 24 HoursThe beginning of the end came on Thursday hours before WaMu failed in the largest bank failure in U.S. history. As Wachovia's stock was falling 6%, its CEO Robert Steel phoned Mr. Pandit.
"We'd like to talk to you," Mr. Steel said.
Mr. Pandit was all ears. Acquiring Wachovia would catapult Citigroup into the upper echelon of U.S. banks. Today, Citigroup has about 1,000 U.S. bank branches -- lagging behind nine other banks, including smaller regional players such as BB&T Corp. and National City Corp., according to the Federal Deposit Insurance Corp. Wachovia has about three times as many U.S. branches as Citigroup.
But Mr. Pandit was interested in Wachovia on one condition: that Citigroup wouldn't have to absorb its toxic portfolio of mortgage and commercial real-estate loans.
Wachovia's motivating factor was not a run on the bank. While the bank and its regulators were nervous that depositors would start yanking their funds, it didn't happen; the bank was fully liquid and hadn't needed to borrow from the Fed.
The bigger problem was a prospective downgrade of Wachovia's debt by Standard & Poor's and Moody's, which representatives of the two ratings agencies had informed Wachovia could occur by Monday. That had the potential to sow greater fear among Wachovia investors and customers, not to mention increasing the bank's borrowing costs just as a batch of its debt was set to mature.
"We were looking at a downgrade today and a death spiral," one person said.
Federal regulators seized WaMu Thursday night. The next day, Wachovia's stock fell 27%, and any idea of raising capital to keep the bank independent took a back seat to a sale.
By Saturday morning, talks had heated up with various suitors, and Mr. Steel and his team flew to New York.
By the evening, Wells Fargo had begun to emerge as the favorite. It had told both Wachovia's advisers and regulators that it was prepared to do a deal without government assistance and was willing to pay a premium. Just as important, Wells Fargo representatives said they were confident they could complete a deal before the stock market opened Monday.
On Sunday morning, Well Fargo Chairman Richard M. Kovacevich met Mr. Steel for breakfast. Mr. Kovacevich reiterated that Wells Fargo could do a deal without the government, saying that he was prepared to offer a price "in the teens." That was well above Wachovia's closing Friday share price of $10 a share.
At that point, Wachovia's dialogue with Citigroup had all but ground to a halt. It was clear that Citigroup would only do a deal with government assistance. Citigroup was worried about Wachovia's risky loan portfolio. Similar concerns led Citigroup to balk at making a formal bid for WaMu last week.
Wachovia believed that the government was unlikely to endorse such a plan if the bank had other viable options.
Midday Sunday, Mr. Kovacevich dropped a bombshell. Wells Fargo had developed concerns about the health of one of Wachovia's loan portfolios. Unless Wachovia could convince it otherwise, Wells Fargo wouldn't be willing to pay any more than $10 a share.
Wachovia's advisers were surprised because the portfolio in question was smaller than many of its toxic mortgage portfolios and didn't have any obvious red flags.
For the next four hours, Wachovia's team tried to ease his concerns, but Mr. Kovacevich kept repeating: "It's not my call, it's our loan people." Behind the scenes, Wachovia's advisers began to hear from regulators that Wells Fargo was getting cold feet.
At about 7 p.m., the parties held a conference call. Mr. Kovacevich said that Wells Fargo still wasn't comfortable with the loan portfolio and wanted a couple of weeks to complete due diligence.
Mr. Kovacevich declined to comment on Monday.
The Wachovia team, which had gathered at its lawyers' offices in the Seagram building in midtown Manhattan, "fell to the floor," according to one person present. Government officials who had been monitoring the deal talks on Saturday and Sunday also were stunned.
Wachovia hadn't given up hope on Wells Fargo but by then it had run out of time. Shortly after the conference call, the FDIC told Wachovia that it was taking control of the process. Since the talks had started, the banks' negotiating teams had been keeping key regulators -- including New York Fed President Timothy Geithner and Treasury Secretary Henry Paulson and others -- in the loop.
Anticipating another long night of banking-bailout talks, some regulatory officials raced home in the early evening Sunday, took showers, and then returned to the office.
For several hours, Wachovia didn't hear from the government. Wells Fargo stopped returning calls. Around 11 p.m., Mr. Pandit headed home, not knowing whether Citigroup was the winner. Wachovia canceled a 12:30 a.m. board meeting, telling its directors to stand by.
In Washington, senior officials at the FDIC, Treasury and other agencies held marathon talks. Mr. Paulson briefed President George W. Bush on the talks, warning that Wachovia's failure could wreak further havoc on the financial system. By 4 a.m. Monday, an agreement had been hammered out in which the FDIC would essentially insure a large chunk of Wachovia's loans in exchange for potentially lucrative stock warrants and preferred shares in the company.
About 15 minutes later, a senior government official called Mr. Steel and told him of the decision. Mr. Steel said he was disappointed but that Wachovia would do "the right thing for the company and the country."
At 6 a.m., the FDIC held an emergency board meeting and approved the staff's recommendation.
Citigroup officials, who had briefed their board of directors on Saturday and Sunday, convened a final conference call at 6:30 a.m. to get final clearance. Wachovia's board also met and approved the deal.
Another key question looming over the talks was the fate of Wachovia's debt outstanding. When J.P. Morgan bought WaMu last week, stockholders and many bondholders were essentially wiped out, sending ripples of concern through credit markets. Negotiators this weekend were scared that a repeat of that would further undermine confidence in the credit markets. Equally troubling, it could cause a chain reaction with several big money-market funds that held Wachovia's debt likely to suffer steep losses.
"Had the debt gone, we would have had the financial system totally collapse this week," said a top adviser to Wachovia.
Ultimately, Citigroup agreed to shoulder Wachovia's roughly $54 billion debt, acknowledging the risks of the bondholders losing everything. Citigroup was "concerned about the systemic impact of yet another fixed-income class splattering," said a senior Citi executive.
—Carrick Mollenkamp and Damian Paletta contributed to this article.
Write to David Enrich at firstname.lastname@example.org and Matthew Karnitschnig at email@example.com