Credit crunch hits Wachovia, forcing sale to Citigroup

The ongoing crisis in U.S. credit markets claimed a major financial institution Monday as federal regulators helped orchestrate the sale of struggling Wachovia Bank, which holds a major share of Hampton Roads' bank deposits.

Citigroup Inc. agreed to buy Wachovia's retail bank, corporate and investment bank and wealth management businesses for $2.16 billion. Wachovia Corp. will keep its brokerage Wachovia Securities and its Evergreen investment unit.

During a long weekend of talks with New York-based Citigroup and other bidders, regulators pushed Charlotte, N.C.,-based Wachovia to agree to a sale. The agreement with Citigroup wiped out most of what remained of Wachovia's stock price, which plunged $8.16 on Monday to close at $1.84.

The Federal Deposit Insurance Corp. asserted Monday that Wachovia did not fail, and that all depositors are protected and there will be no immediate cost to the Deposit Insurance Fund. However, the FDIC will cover losses from Wachovia's $312 billion loan portfolio above the $42 billion that Citigroup agreed to absorb.

The deal greatly expands Citigroup's retail franchise - giving it a total of more than 4,300 U.S. branches and $600 billion in deposits - and secures its place among the U.S. banking industry's Big Three, along with Bank of America Corp. and JPMorgan Chase & Co. Citigroup also reclaims its title as the biggest U.S. bank by total assets - $2.91 trillion.

But it comes at a cost: Citigroup said it will slash its quarterly dividend in half to 16 cents. It also will dilute existing shareholders by selling $10 billion in common stock to shore up its capital position. Citigroup also will issue

$12 billion in preferred stock and warrants to the FDIC.

With slightly more than $4 billion of deposits in Hampton Roads, Wachovia held almost 22 percent of the region's deposits in mid-2007, according to the FDIC's most recent report on bank deposits by market.

Wachovia has 48 branches and slightly more than 700 employees in Hampton Roads. Because Citigroup has no branches in the region, it's unlikely that there will be a significant job cuts. Wachovia, which operates in 20 other states, has 120,000 employees.

The sale "brings a new and different competitor to the streets of Hampton Roads," said Bob Aston, chairman and CEO of Portsmouth-based TowneBank, the largest bank based in the region.

But because of Citigroup's size and the complexity of its operations, it's difficult to tell how the already competitive banking environment in Hampton Roads might change, he said.

Some customers at the bank's World Trade Center branch in downtown Norfolk said they saw no need to close their accounts at the bank.

"Citigroup is a solid institution," and the transition in ownership is likely to be orderly, said Alan Flanders, a Portsmouth resident who teaches history at Tidewater Community College's Norfolk campus and has several accounts, including a checking and a retirement account, with Wachovia.

News that the bank was being sold spread quickly at TCC on Monday morning, and some who have accounts there expressed worries about the sale, he said.

Several details about Wachovia Bank's consolidation into Citigroup have yet to be addressed, said Christine Shaw, a Wachovia spokeswoman.

One likely will involve the Wachovia Center complex of offices, retail space and apartments taking shape near MacArthur Center mall in downtown Norfolk. The

$150 million project includes a 22-story office building that Wachovia planned to use.

The deal with Citigroup won't affect plans for the complex and doesn't jeopardize Wachovia's financing for it, said Tom Johnson, senior vice president of Norfolk-based S.L. Nusbaum Realty Co., the project's developer.

"They've leased about 41,000 square feet of space, including the bank branch downstairs, and they've signed 15-year leases on all of that," Johnson said. "From a standpoint of what they'll do with their operations here, we really don't know. But we certainly don't see this as being a negative."

Wachovia, the product of a 2001 combination of North Carolina banks First Union and Wachovia, stumbled badly after it acquired Golden West Financial Corp., a large savings bank in Oakland, Calif., at the peak of the housing bubble two years ago. The transaction gave Wachovia 285 branches in 10 western states but saddled it with billions of dollars in risky mortgages that eventually soured.

For the six months through June, Wachovia reported a loss of almost $10 billion, due in part to the shrinking value of these mortgages.

Ken Thompson, a Wachovia veteran who served as its chief executive officer for eight years, was ousted by the board of directors in June. A month later, the bank hired Robert Steel, a Treasury Department official and a former executive of the investment bank Goldman Sachs, to replace Thompson. To stabilize Wachovia, Steel took several major steps, which included slashing its dividend, cutting its work force and halting certain types of loans.

"During recent weeks, the financial landscape has changed significantly and presented us with unprecedented challenges," Steel said in a statement.

Citigroup CEO Vikram Pandit said he is working with Steel in setting up a transition team. "We will make sure that we execute on this with a great deal of precision and a great deal of speed," he said.

Pilot writer Josh Brown and The Associated Press contributed to this report.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com