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Wachovia CEO: Nothing changes for customers

Posted September 29, 2008

— Wachovia CEO Robert K. Steel sought to reassure employees that the company is stable despite a pending deal with Citigroup Inc.

In a deal facilitated by the Federal Deposit Insurance Corp., Citigroup (NYSE: C) 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 company that owns businesses not included in the deal, including the brokerage business and retirement services, will be known as Wachovia, and the headquarters will remain in Charlotte, Steel said in a memo to colleagues Monday.

Wachovia (NYSE: WB) employs about 20,000 people in Charlotte, and analysts predicted the Queen City could bear the brunt of layoffs from the merger.

Tony Plath, a finance professor at the University of North Carolina-Charlotte, said about a quarter of those workers could lose their jobs and that other Wachovia-related jobs in the community could also be at risk.

The company said in a news release that Citigroup will base the retail bank in Charlotte and the investment bank in New York. Wachovia's securities brokerage and asset management operations weren't included in the buyout.

"Since many details of this agreement are still being finalized, definitive answers to many of your questions remain unknown at this point," Steel's memo said. "What is important to note, however, is that nothing changes today for employees or customers."

Wachovia also employs about 2,000 people in the Triangle, but analysts said those jobs would likely be better insulated because Citigroup has no presence in the region.

"In the short term, I think everyone's going to contract," said Steven Schwarcz, a professor of law and business at Duke University. "Citigroup is a major international bank, and the takeover could (eventually) make Charlotte even more of an international bank center."

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.

"This will trickle down adversely through the Charlotte economy," said Mike Walden, an economist with North Carolina State University.

"The good news is depositors should not worry. Things will go on normally," Walden said. "The concern, to me at least as an economist, is what this means to Charlotte and to North Carolina. This is one of the two pillars of the banking system in Charlotte."

Raleigh investment adviser Gerald Townsend said the buyout ended a period that has tried shareholders' patience. Wachovia stock had lost nearly 75 percent of its value this year, through Friday.

Trading was suspended Monday, but the bank's stock dived in pre-trading from $10 a share down to less than $1.

"For Wachovia as an institution, I think the message is, 'It's over.' Its price has plummeted. Its operations – its banking operations, the core of its business – has been sold off to another company. The lights are cut off, the party's over," Townsend said.

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. 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. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.

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.

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

The FDIC said Wachovia customers with questions should call their normal banking representative, service center, 800-922-4684 or visit Wachovia's Web site. The FDIC consumer hotline is 877-ASK-FDIC (877-275-3342), or people can visit the agency's Web site.

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.

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.

The Wachovia deal caps a wave of unprecedented upheaval in the financial sector in the past six months that has redefined the banking industry.

47 Comments

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  • Oberlin Sep 29, 2008

    Except that most credit unions are not for profit, so they have no reason to do subprime, shaky mortgages to begin with. So, like i said, I like my credit union because it focuses on what is best for its members, not stockholders. If someone wants to use a bank I don't have a problem with it - I'm just glad there is an alternative.

  • Heel from Hell Sep 29, 2008

    Credit unions are prohibited by law from getting into the "banking realm" so stop portraying CU's as beyond reproach. Given the opportunity to do so, they'd be lying right beside WaMu, Wachovia, and IndyMac...casualties of unscrupulous mortgage lenders.

  • enoughsenough Sep 29, 2008

    Makes me glad to have a job with some security. I also love the credit union I belong to. Good luck to all affected by this mess.

  • ncwebguy Sep 29, 2008

    The Golden West purchase did Wachovia in. Period. Nothing more, nothing less. It could happen anywhere, but it happend to happen at Wachovia. They should have let GW implode and pick up the pieces, instead they jumped right on the grenade before it blew up. It is sad that Charlotte and NC will have to pay for the greed of the California housing finance scams.

    BoA's purchase of Countrywide could hurt them big too, though the government will probably save them with a big chunk of the $700 billion hyperinflation trigger.

    Who has time to work a full time job, raise a family *and* take classes? No one. Not everyone has the "luxury" to be unemployed, post on here all day every day.

  • Oberlin Sep 29, 2008

    This is why I love my credit union. I get the same services, better rates and lower fees without all the risk. Banks do a great job for business accounts, but for personal banking the credit union is all I really need.

  • Wags Sep 29, 2008

    You should have seen the light on the tracks 18 months ago and went and got retrained at the local community college. You didn't see it coming, but you saw those bad mortgages floating around - sad for you.

    We have seen it coming for a long time. Still doesn't make it any easier to lose your job.

  • 007KnightRider Sep 29, 2008

    I bank at Wachovia and I'm very surprised of this situation. I thought Wachovia was better than most companies. I thought wrong!

  • TheAdmiral Sep 29, 2008

    "As an employee for Wachovia Mortgage in Raleigh, this just sucks."

    You should have seen the light on the tracks 18 months ago and went and got retrained at the local community college. You didn't see it coming, but you saw those bad mortgages floating around - sad for you.

  • TheAdmiral Sep 29, 2008

    So the unethical practices of Walk-All-Ovia has finally come to an abrupt and timely end.

    The CEO of Walk-All-Ovia should not get any cash in his parachute. Just shoot him down the tubes.

  • JAT Sep 29, 2008

    but weren't all those "high paying jobs" the people who were making the bad loan decisions to begin with??? It sure won't the tellers or the admins or the data entry folks.

    I'm real surprised at Wachovia because they're usually so conservative with their lending.

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