Divestiture of banking subsidiaries - WACHOVIA

On 29 September 2008, the Federal Deposit Insurance Corporation (FDIC) announced that Citigroup will acquire Wachovia Corporation's banking operations. The transaction is an "open bank" transfer of ownership. Wachovia's bank subsidiaries did not fail, nor were they placed into receivership. The transaction was facilitated by the FDIC, with the concurrence of the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President.[6][7][30]

After Steel took over, he insisted that Wachovia would stay independent. However, its stock price plunged 27 percent during trading on September 26 due to the seizure of Washington Mutual the previous night. On the same day, several businesses and institutional depositors withdrew money from their accounts in order to drop their balances below the $100,000 insured by the FDIC--an event known in banking circles as a "silent run." The exact amount of money withdrawn is still unknown, but according to The Charlotte Observer, it was large enough to attract the attention of the Office of the Comptroller of the Currency, which regulates national banks. Federal regulators pressured Wachovia to put itself up for sale over the weekend; had Wachovia failed, it would have been a severe drain on the FDIC's insurance fund due to its size.[31][32]

As business halted for the weekend, Wachovia was already in talks with Citigroup and Wells Fargo. Wells Fargo initially emerged as the frontrunner to acquire the ailing Wachovia's banking operations, but backed out due to concerns over Wachovia's commercial loans. By this time, regulators were concerned that Wachovia wouldn't have enough short-term funding to open for business on September 29. In order to obtain enough liquidity to do business, banks usually depend on short-term loans to each other. However, the markets had been so battered by a credit crisis related to the housing bubble that banks were skittish about making such loans. Under the circumstances, regulators feared that if customers pulled out more money, Wachovia wouldn't have enough liquidity to meet its obligations.[32]

On the morning of September 29, the FDIC board, acting under a 1991 law empowering it to deal with large bank failures on short notice, voted to order Wachovia to sell itself to Citigroup. The FDIC's open bank assistance procedures normally require the FDIC to find the cheapest way to rescue a failing bank. However, the FDIC bypassed this requirement after determining that Wachovia posed a "systemic risk" to the health of the economy. Steel had little choice but to agree, and the decision was announced roughly 45 minutes before the markets opened.[32]

In addition, the FDIC said that the agency would absorb Citigroup's losses above $42 billion; Wachovia's loan portfolio is valued at $312 billion. In exchange for assuming this risk, the FDIC will receive $12 billion in preferred stock and warrants from Citigroup.[6][33][34][35] The transaction is to be an all-stock transfer, with Wachovia Corporation stockholders to receive stock from Citigroup, valuing Wachovia stock at about one dollar per share for a total transaction value of about $2.16 billion. Citigroup will also assume Wachovia’s senior and subordinated debt.[36][33] Citigroup intends to sell ten billion dollars of new stock on the open market to recapitalize its purchased banking operations.[33] The proposed closing date for the Wachovia purchase is by the end of the year, 2008.[9]

Wachovia will continue as a publicly traded company and will retain its retail brokerage and Evergreen asset management subsidiaries.[36] The brokerage unit has 14,600 financial advisers and manages more than $1 trillion, third in the U.S. after Merrill Lynch and Citigroup's Smith Barney.[33]

The announcement has drawn some criticism from Wachovia stockholders who feel the dollar-per-share price is too cheap. Some of them plan to try to defeat the deal when it comes up for shareholder approval. However, institutional investors such as mutual funds and pension funds control 73 percent of Wachovia's stock; individual stockholders would have to garner a significant amount of support from institutional shareholders to derail the sale. Also, several experts in corporate dealmaking told the Observer that such a strategy is very risky since federal regulators helped broker the deal. A finance professor at the University of North Carolina at Charlotte told the Observer that if Wachovia's shareholders vote the deal down, the OCC could simply seize Wachovia and place it into the receivership of the FDIC, which would then sell it to Citigroup. If this were to happen, the professor said, Wachovia's shareholders risk being completely wiped out.[37]