Loss-sharing helps us
Wachovia Bank takeover
FDIC role costs taxpayers least.
Loss-sharing helps us

By MARCY GORDON

Published: September 30, 2008

WASHINGTON — The FDIC's agreement to share potential multibillion-dollar losses on Wachovia Corp.'s mortgage loans with Citigroup Inc. is a way for the government to ensure a solution at the least cost to taxpayers, banking experts say.

The government made similar deals with buyers of crippled institutions during the savings and loan crisis, and in more recent years, but never on this big a scale for an individual bank.

It's "a precedent-setting transaction,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington.

In the deal orchestrated by the Federal Deposit Insurance Corp., branch-hungry Citigroup is buying Wachovia's banking operations and agreed to absorb as much as $42 billion in losses from Wachovia's $312 billion loan portfolio.

The FDIC will cover losses above that level. Citigroup is giving the agency $12 billion in preferred shares and warrants to compensate it for taking on the risk.

Citigroup and Wells Fargo & Co. both reportedly pored over the books this weekend of Wachovia, which was weighed down by losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.

While the failed federal rescue package would have prevented most banks from profiting on the sale of troubled assets to the government, an exception would be made for assets acquired in a merger or buyout.

That would allow Citigroup to sell Wachovia's distressed mortgage-related assets to the government for a profit, assuming its $2.1 billion acquisition goes through.

The deal is subject to approval by Wachovia's shareholders and regulators and must be completed by Dec. 31, according to Citigroup.

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