Banking, finance, and taxes
Wachovia/Citi... An FDIC Backed Bailout Debacle For Holders (WB, C)
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Wachovia Corporation (NYSE: WB) is the newest big bank that is being taken over in a government-sponsored deal. Citigroup (NYSE: C) is acquiring the bulk of the bank’s assets and liabilities in an FDIC-facilitated transaction. Citigroup will assume the senior and subordinated debt of Wachovia, and will absorb the first $42 billion in losses on a $312 billion loan pool. The FDIC is quick to say that Wachovia didn’t fail, yet it is also going to share in the losses.
The FDIC will absorb the losses beyond $42 billion, and Citigroupis going to issue preferred stock and warrants to theFDIC. Part of Wachovia will survive as A.G. Edwards and Evergreen willcontinue on its own and not be part of the Citigroup deal.
Wachovia’s common stock looks like it is toast. Shares are down some90% at $0.99 after closing at $10.00 Friday. It looks like the debtand preferred shares will hold up, but we’d caution on making an heroicbets here. Sticking your head out far in the financialservices sector has been very unrewarding so far. Citigroup shares were up initially on this, but now are down almost 5% at $19.15 in pre-market trading.
If you are a common stock shareholder, it looks like the best hope here is a solid tax write-off against other gains if you have any this year. And some wonder why so many investors were short selling bank stocks. Stay tuned.
Jon C. Ogg
September 29, 2008
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