Citigroup bails out another struggling rivalThe US woke up to the demise of yet another high-street banking name yesterday when Wachovia agreed to a rescue takeover by the world's biggest bank, Citigroup. Citigroup is buying the bulk of the troubled finance group's assets for a bargain-basement price of $2.16bn (£1.2bn) in stock, in a deal brokered by financial regulators to avert the possibility of another high-profile failure after Washington Mutual's collapse last week. In an unusual step, the Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation (FDIC), an independent U.S. federal executive agency designed to promote public confidence in banks and to provide insurance coverage for bank deposits up to $100,000. has agreed to stand behind Wachovia's $312bn of risky mortgages and underperforming assets underperforming asset An asset that earns a lower rate of return than it would be capable of earning if it were properly used. A firm with underperforming assets is a prime target for takeover. Compare nonperforming asset. to limit Citigroup's losses to a maximum of $42bn. "This action was necessary to maintain confidence in the banking industry," said the FDIC's chairwoman, Sheila Bair. Wachovia is a familiar brand across the US with 3,300 branches in 21 states. Named after an area of North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures Area, 52,586 sq mi (136,198 sq km). Pop. that took its name from Austria's Wachau valley, it employs 120,000 people and, as of June, held $447bn of customers' deposits. Citigroup, which is raising $10bn through a placing of shares to help finance the deal, said the takeover advanced its aim of becoming a "global universal bank". "We at Citigroup had the chance to look at a number of deals. This one is compelling," said Citigroup's chief executive, Vikram Pandit Vikram Pandit received an MS degree in 1977 and a BS degree in electrical engineering in 1976 from Columbia. He also earned a PhD in Finance from Columbia University in 1986. . "We have contained the risk in the transaction. Not only is it a high-opportunity deal but also a low-risk transaction." The deal will give Citigroup the broadest branch network of any US bank, with a 9.8% market share and total deposits worldwide of $1.3tn. Like Washington Mutual “WaMu” redirects here. For the Washington, DC radio station, see WAMU. Washington Mutual (or WaMu; NYSE: WM) is the United States' largest savings and loan association. , Wachovia ran into trouble because of its bulging portfolio of mortgages known as "option ARMs". These allow customers great flexibility in setting the level of their repayments - some are permitted to make payments that do not even meet accruing interest. "They allowed marginal buyers to buy homes they really couldn't afford," said Donn Vickrey, co-founder of Gradient Analytics. "Everything was fine as long as house prices went up and they could continue to refinance." A slump in the US property market has made it impossible for many customers to switch to more sustainable mortgages, leaving Wachovia facing huge losses. Wachovia's chief executive, Robert Steel, who was appointed in July on a $1m salary after the bank had run into difficulties, insisted the group's core businesses continued to do well, but said: "Amid uncertain markets and a fast-changing industry landscape, we found Citi a strong partner to preserve the stability and quality of our banking franchise." Since the beginning of the year, 14 commercial banks have collapsed in the US, compared with only three failures over the previous three years. The FDIC FDIC See: Federal Deposit Insurance Corporation FDIC See Federal Deposit Insurance Corporation (FDIC). last month said it had a "watch list" of 117 further institutions facing potential problems, holding $78bn of assets. In return for providing a guarantee against Wachovia's losses, the FDIC will receive preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. and warrants of $12bn in Citigroup. Wachovia's share price dived from $10 to 96 cents in early trading yesterday. At the beginning of the year, the stock was changing hands for $38. The US treasury secretary, Henry Paulson, backed the deal: "I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk Systemic Risk Risk common to a particular sector or country. Often refers to a risk resulting from a particular "system" that is in place, such as the regulator framework for monitoring of financial_institutions. . "As a result of this transaction, all Wachovia depositors will be protected and Wachovia's senior and subordinated debt Subordinated Debt A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known as "junior security" or "subordinated loan". will be assumed by Citigroup." Backstory back·sto·ry n. 1. The experiences of a character or the circumstances of an event that occur before the action or narrative of a literary, cinematic, or dramatic work: The Federal Deposit Insurance Corporation's quarterlywatch list of potentially troubled US banks lengthened length·en tr. & intr.v. length·ened, length·en·ing, length·ens To make or become longer. length  en·er n. last month from 90 to 117. The FDIC, which guarantees customers' money held in US banks, said the list was the longest since mid-2003 and is asking its members to increase contributions to a dwindling dwin·dle v. dwin·dled, dwin·dling, dwin·dles v.intr. To become gradually less until little remains. v.tr. To cause to dwindle. See Synonyms at decrease. bail-out fund. "These are challenging times," said the FDIC's chairwoman, Sheila Bair. "More banks will come on the list as credit problems worsen." The FDIC does not disclose the identity of institutions on the list but it said the aggregate of assets held by them had risen from $26bn to $78bn. Profits at US banks fell 87% to $5bn in the second quarter. 
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