Citigroup Buys Wachovia, the Bank Channel’s Top Annuity Seller
September 29, 2008
Citigroup has taken over Wachovia, the nation’s fourth largest bank and by far the biggest earner of fees and commission from the sale of annuities in the bank channel in the U.S., according to Britain’s SBS World News. The takeover was announced September 29, as U.S. equity markets were plunging.
The Federal Deposit Insurance Corp. (FDIC), which insures and regulates banks, said that Wachovia "did not fail." Under the takeover agreement, the government will obtain a stake in Citigroup in exchange for guaranteeing much of the distressed Wachovia assets linked to housing.
Citigroup will pay $2.16 billion in stock to Wachovia and assume the senior and subordinated debt of Wachovia Corporation, the companies said. New York-based Citigroup will assume up to $42 billion in losses from a pool of $312 billion in loans held by Wachovia. The FDIC will absorb losses beyond that.
In exchange, Citigroup granted the FDIC $12 billion dollars in preferred stock and warrants to compensate the agency for bearing this risk. Citigroup, which will become the largest US bank by total deposits, said it expected to raise $10 billion in common shares to help finance the transaction.
Citigroup said the acquisition would create a leading retail bank with a 9.8% share of US market deposits, and total deposits of $1.3 trillion. Wachovia had $812 billion in assets at the end of June. The takeover was orchestrated with the Federal Reserve and Treasury Secretary Henry Paulson, in consultation with Bush, the FDIC said.
"A failure of Wachovia would have posed a systemic risk," Paulson said. Shares in Wachovia had lost 73% of their value in a year and were plummeting in recent days as investors feared there would be a panic run on the beleaguered bank, as had occurred to its rival, savings and loan bank Washington Mutual.
Standard & Poor's placed both companies on Credit Watch with negative implications. The merger agreement with Wachovia in itself does not add materially to Citigroup's risk "because it is structured essentially as an acquisition of a 'clean' bank, S&P said in a statement," the credit agency said.
Shares in Citigroup fell 11.9% to $17.75 Monday in a massive late sell-off on Wall Street after the House rejected the bailout bill. The Dow Jones Industrial Average lost 777.68 points, the biggest one-day point drop ever. Wachovia shares became nearly worthless, plunging 81% to end the day at $1.84.
In the first quarter of 2008, Wachovia earned $194 million in fees and commissions from annuity sales, up from $155 million in the fourth quarter of 2007, according to Bank Insurance & Securities Association. In 2007, Wachovia earned $483 million from annuity sales. JPMorgan Chase was second with $163 million.
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