Citigroup in Wachovia rescue deal

| September 29, 2008

The credit crisis has claimed yet another High Street bank as Wachovia, once America’s fourth biggest bank, has agreed to a rescue takeover by the world’s largest bank, Citigroup.

Wachovia saw its share price plummet 90% to below 70¢ when Wall Street opened today. Federal regulators helped to arrange a deal in which Citigroup will take on $42 billion (£23 billion) of losses on a $312 billion pool of loans held by Wachovia, which has a portfolio of risky mortgages.

Under the terms of the agreement, the Federal Deposit Insurance Corporation (FDIC) will absorb any losses that exceed Citigroup’s agreed liability in return for $12 billion of preferred stock for taking on the risk.

However, it has been made clear by the FDIC that Wachovia did not collapse but it has stepped in to sell the bank ‘to avoid serious adverse effects on economic conditions and financial stability‘.

In order to help finance the deal, Citigroup said it would raise $10 billion of capital by issuing new shares.

The news comes just a few days after Washington Mutual was closed by the Federal Office of Thrift Supervision and its assets were sold to banking giant, JPMorgan Chase, for $1.9bn (£1 billion).

Furthermore, in the last two weeks, there has been the collapse of Wall Street giant, Lehman Brothers, the rescue of US insurance giant AIG, Bank of America’s takeover of Merrill Lynch and in the UK, Lloyds TSB’s takeover of HBOS.

Meanwhile, in the last six months, there has been the collapse of Wall Street bank Bear Stearns and the Government takeovers of mortgage companies Fannie Mae and Freddie Mac.

In addition, just today it was announced that the UK’s largest buy-to-let lender, Bradford & Bingley is to be nationalised.

Belgian-Dutch financial group Fortis has been partially nationalised after concerns were raised about its future health over the weekend.

The Governments of Belgium, Luxembourg and the Netherlands are to invest a total €11.2 billion (£8.9 billion) in the respective Fortis bank institutions in each country. Each Government will take a 49% stake in Fortis.

Finally, it has been announced today that Iceland’s third largest bank, Glitnir, has been nationalised after it faced short-term funding problems.

It is the first bank in the country to be nationalised since the start of the credit crunch.


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