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Just four days after the news reported Citigroup was taking over Wachovia, Wells Fargo Bank
makes a much better offer and asks for no FDIC help -Wachovia’s Board grabs the deal. The deal gives Wachovia shareholders $7 - instead of the $1 Citigroup deal.

 

NEWS Update from The Wall Street Journal Digital Network – Market Watch

 

Wachovia's Board Abandon’s Deal With Citi Bank -Approves Wells Fargo Merger Proposal

Last update: 7:04 a.m. EDT Oct. 3, 2008

Wells Fargolast night presented Wachovia with a signed and Board-approved offer to purchase Wachovia Corporation as an intact company and without government assistance in a stock-for-stock merger transaction. Under the Wells Fargo proposal, each share of Wachovia common stock will be exchanged for 0.1991 shares of Wells Fargo common stock, representing a value of $7 per share, based on Wells Fargo's closing stock price on Oct. 2, 2008.

 

Prior to receiving this proposal, Wachovia had been negotiating with Citigroup to complete a transaction supervised by the FDIC that included assistance from the government. Wachovia's Board approved Wells Fargo's offer last night.

 

"We at Wachovia have great admiration and respect for the people and businesses at Wells Fargo and we are extremely pleased to join forces with this outstanding company," said Robert K. Steel, President and CEO of Wachovia Corp. "Today's announcement creates one of the strongest financial firms in the world and is great for all Wachovia constituencies: our shareholders, customers, colleagues and communities. This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support. The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complementary and this combination creates great potential for sustained stability and growth."

 

Wells Fargo and Wachovia will have the largest deposit base in the country, creating a coast-to-coast banking franchise for consumers. In addition, Wachovia will combine with the only AAA-rated financial institution in the United States. Additional details on the transaction are included in the press release issued by Wells Fargo.


Associated Press (AP) News Release

Citigroup to buy Wachovia banking operations
Monday September 29th 2008
Citigroup will buy Wachovia's banking operations; FDIC says Wachovia didn't fail.
 
In the latest byproduct of the widening global financial crisis, Citigroup Inc. will acquire the banking operations of Wachovia Corp. in a deal facilitated by the Federal Deposit Insurance Corp.

Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the FDIC covering any remaining losses, the government agency said Monday. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.

The deal greatly expands Citigroup's retail outlets and secures its place among the U.S. banking industry's Big Three, along with Bank of America Corp. and J.P. Morgan Chase & Co. But it comes at a cost -- Citigroup said Monday it will seek to sell $10 billion in common stock and slashed its quarterly dividend in half to 16 cents to shore up its capital position.

The agreement comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia, which suffers from mounting losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.

Wachovia, like Washington Mutual Inc., which was seized by the federal government last week, was a big originator of option adjustable-rate mortgages, which offer very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.

The FDIC asserted Monday that Wachovia did not fail, and that all depositors are protected and there will be no cost to the Deposit Insurance Fund.

Federal Reserve Chairman Ben Bernanke, in a statement Monday, said he supports the "timely actions" taken by the FDIC "which demonstrate our government's unwavering commitment to financial and economic stability."

Treasury Secretary Henry Paulson also welcomed the sale of Wachovia to Citigroup, saying it would "mitigate potential market disruptions." Paulson said he agreed with the FDIC and the Fed that a "failure of Wachovia would have posed a systemic risk" to the nation's financial system. "As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy," Paulson said.

As details of its takeover unfolded, Wachovia shares plunged 91 percent to 94 cents. The stock had closed Friday at $10, down 74 percent for the year.

Now that a deal for Wachovia is complete, the most troubled of the nation's largest financial institutions have been dealt with. However, the FDIC estimated there were 117 banks and thrifts in trouble during the second quarter, the highest level since 2003. And that number is likely to have increased during the third quarter.

With the acquisition of Wachovia, Citigroup has reclaimed its title as the biggest U.S. bank by total assets. Including Wachovia, the bank now has assets of $2.91 trillion, as of June 30. That could change, however, as Citigroup shrinks its balance sheet, a decision Chief Executive Vikram Pandit made in May to rid the bank's books of risky debt

In terms of current market capitalization, Bank of America Corp. remains the largest U.S. bank, followed by JPMorgan Chase & Co. in second and Citigroup in third place.

Just a short time ago, Citigroup was under the scrutiny of investors who worried about the possibility of its collapse given its massive exposure to mortgage-backed securities. The New York-based bank has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the most write-downs of any U.S. bank.

But the government's proposed $700 billion bailout plan could prove to be the deal's silver lining.

While the plan broadly aims to prevent banks from profiting on the sale of troubled assets to the government, there is an exception made for assets acquired in a merger or buyout, or from companies that have filed for bankruptcy.

This detail could allow Citigroup to sell toxic mortgages and other assets it gained from Wachovia for a higher price than the bank actually paid for them.

The Wachovia deal caps a wave of unprecedented upheaval in the financial sector in the past six months that has redefined the banking industry, starting with the government-led forced sale of Bear Stearns Cos. to JPMorgan in March.

The failure of IndyMac Bancorp in July reignited investors' fears about the stability of the financial sector, which led to the eventual takeover of struggling mortgage lenders Fannie Mae and Freddie Mac.

Earlier this month, officials seized both Fannie and Freddie, temporarily putting them in a government conservatorship, replacing their chief executives and taking a financial stake in the mortgage finance companies.

After U.S. regulators made it clear that they would not bail out struggling investment bank Lehman Brothers Holdings Inc., rival Merrill Lynch & Co. arranged a hasty deal to be bought by Bank of America Corp. for $50 billion in stock.

Lehman Brothers was subsequently forced to declare bankruptcy, the largest ever in the United States. Investor concerns quickly turned to American International Group Inc., the nation's largest insurer.

Staving off a failure that could have sent shock waves throughout the global markets, the federal government injected an $85 billion emergency loan into the insurer.

Just days later, the government seized Seattle-based Washington Mutual, marking the largest bank failure in U.S. history. WaMu's deposits and assets were acquired by JPMorgan for $1.9 billion.

These events have now culminated in extraordinary moves by the federal government to try to fix the financial crisis that began more than a year ago. Lawmakers are to vote Monday on an unpopular $700 billion plan to rescue troubled financial companies.

Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs -- mostly in its mortgage business -- and slashed its dividend. Wachovia also boosted its provision for loan losses to $5.57 billion during the second quarter, up from $179 million in the year-ago period.

AP Business Writers Jennifer Malloy Zonnas and Madlen Read in New York contributed to this report.

 

 

Education from the New York Times
WaMu is seized in largest bank failure in U.S. history

September 25, 2008

 

Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual, the nation's largest savings and loan, with $307 billion in assets, to JPMorgan Chase & Co., for $1.9 billion.

 

The move removes one of the most troubled U.S. banks from the financial landscape while mitigating another potentially huge taxpayer bill for a rescue

Customers of Seattle-based WaMu are unlikely to be affected, although shareholders and some bondholders will be wiped out. WaMu account holders are guaranteed by the Federal Deposit Insurance Corp. (FDIC) up to $100,00

By taking on all of its troubled mortgages and credit loans, JPMorgan will absorb at least $31 billion in losses that would normally have fallen to the FDIC

JPMorgan Chase -- which acquired Bear Stearns only six months ago in another shotgun deal brokered by the government -- is to take control today of all of WaMu's deposits and bank branches, creating a nationwide retail franchise behemoth that rivals only Bank of America

But JP Morgan will also take on Washington Mutual's big portfolio of troubled mortgage and credit card loans. The failed bank was only a minor player in the Minnesota mortgage market

JP Morgan plans to shut down at least 10 percent of the combined company's 5,400 branches in markets. It also plans to raise an additional $8 billion by issuing common stock today to pay for the deal

 

Washington Mutual is by far the biggest bank failure in history, eclipsing the 1984 failure of Continental Illinois National Bank and Trust in Chicago, an event that presaged the savings and loan crisis. IndyMac, which was seized by regulators in July, was a tenth the size of WaMu

"This institution was a big question mark about the health of the deposit fund," Sheila C. Bair, the chairwoman of the FDIC, said of WaMu on Thursday. "It was unique in its size and exposure to higher risk mortgages and the distressed housing market. This is the big one that everybody was worried about."

The seizure and the deal came as a shock to Washington Mutual's board, which was kept in the dark: the company's newly minted chief executive, Alan C. Fishman, was in flying from New York to Seattle at the time the deal was brokered, according to these people

Move spares FDIC fund

As with Lehman Bros., the government allowed Washington Mutual to fail because it was less entangled with the rest of the financial system than a behemoth like American International Group Inc., which the government spent $85 billion to take over last week while it faced collapse. On Sunday, the government approved emergency measures to help stabilize Goldman Sachs and Morgan Stanley.

 

Federal regulators had been trying to broker a deal for Washington Mutual because a takeover by the FDIC would have dealt a crushing blow to the federal government's deposit insurance fund. The fund, which stood at $45.2 billion at the end of June, has been severely depleted from the sudden collapse of IndyMac Bank. Analysts say that a failure of Washington Mutual would cost the fund upward of $20 billion or $30 billion.

 

The deal will end WaMu's run as an independent company, but stabilize the bank's finances and shore up its balance sheet, crippled by a toxic mortgages.

A recent fall from grace

Until recently, Washington Mutual was one of Wall Street's strongest performers. It reaped big profits quarter after quarter as its then chief executive, Kerry Killinger, enlarged its footprint by buying banks on both coasts and ramping up mortgage lending

His goal was to transform what was once a sleepy Seattle thrift into the "Wal-Mart of Banking," which would cater to lower- and middle-class consumers that other banks deemed too risky. It offered complex mortgages and credit cards whose terms made it easy for the least creditworthy borrowers to get financing. WaMu even rolled out Starbucks-style kiosks to reduce waiting times.

With this grand plan, Killinger built Washington Mutual into the sixth-largest bank in the United States, with roughly 2,300 consumer and small business branches, total assets of $310 billion, and total deposits of $182 billion.

But underneath the hood, the bank's machinery was failing. Even as it grew in size, it underinvested in the technology needed to gauge how its vast loan operation was performing. Killinger, who once boasted of the giant he had created, struggled to integrate the many banks he had picked up. Near the top of the housing market, WaMu had nine different mortgage underwriting systems.

Then the housing market began to crumble. The bank tried to hedge its mortgage bets -- but did so poorly. It retrenched on its ranch-building ambitions. But none of that was enough to deflate ballooning losses on mortgage loans.