Citi will acquire "the bulk of Wachovia's assets and liabilities," the FDIC statement said. Under the agreement, Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, while the FDIC will take losses beyond that.
The Wachovia deal was facilitated by the FDIC with the blessing of the Federal Reserve and the Treasury Dept.
Let's back up for a moment and look at the above information in a bit more detail.
1.) 13.46% of Wachovia's loans were bad. That should tell you how bad things are out there. This is also why I am deeply concerned about this "mark to market" study they want to include in the bail-out bill. If we start using a mark to fantasy asset valuation model we're in deep trouble.
However, consider the depth of the problem. Over 10% of the loans were in poor shape. That's a ton of loans.
Wachovia reported $9.7 billion of losses in the first half of 2008. The slide toward collapse began when the bank paid more than $24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $122 billion of the adjustable- rate home loans. Kennedy Thompson, the chief executive officer at the time, later admitted that the purchase at the height of the real estate boom was ill-timed.
Wachovia is the largest holder of option ARMs, ahead of Washington Mutual, the Seattle-based lender that collapsed last week. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41 percent from year-earlier levels.
Gee - y'think? Someone had absolutely no idea about the problems coming down the pike when they made that purchase. That shows a completely stupid management that deserves to fail in my book.
2.) The FDIC and Federal Reserve are busy bees aren't they? They're playing deal maker for anyone, trying to avoid a ton of problems for the US taxpayer if at all possible. My guess is the bank insurance program is under serious strain right now and the FDIC and Treasury are trying to avoid another set of problems. Here's the reason I think that:
Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in the statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.
Citi is first in line to absorb losses. Federal authorities start to absorb losses after the $42 billion is absorbed.
And here's another set of problems for Citi:
``Of course they are going to raise capital,'' Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC. ``I don't know how they absorb $42 billion on the income basis they have,'' Whitney said.
Who is going to provide money to Citi? Who in their right mind thinks any financial company is worth the paper they are printed on right now?
Bottom line: the Feds are trying to patch up one hole, while creating another down the line.