Now It's Wachovia's Turn

The banking crisis of the past several months has had one common thread: As soon as the bank in the spotlight goes under, a wave of negative attention immediately shifts to who's next.

After Bear Stearns' fallout in March, all attention shifted to Lehman Brothers. After Lehman Brothers failed, all attention shifted to AIG (NYSE: AIG  ) . After AIG was bailed out, all attention shifted to Washington Mutual (NYSE: WM  ) .

Now that WaMu's gone, Wachovia (NYSE: WB  ) seems to be the victim of the day. Shares were virtually decimated this morning after Citigroup (NYSE: C  ) made a last-second deal to take over its banking operations after a weekend-long bidding war with Wells Fargo (NYSE: WFC  ) . What's this mean for shareholders? Nothing good. Citigroup will pay out a scant $2.16 billion worth of its own stock, which equates to around $1 per share, give or take.  

Technically, Wachovia did not fail. As if it was acting to dispel fear that banks are dropping like flies, the FDIC specifically stated, "Wachovia did not fail; rather, it is to be acquired by Citigroup … on an open bank basis with assistance from the FDIC."

Yada, yada, yada … the best way to translate that is to assume it would have failed rather quickly had a deal not gone through. The FDIC is the organization that insures bank deposits in the event a bank fails; the fact that it stepped in to help Citigroup take over Wachovia's operations is testament to how dire the banking-industry situation is these days.

For example, this morning's press release states: 

The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that.

In return, the FDIC will receive $12 billion in preferred shares and warrants. To shore up its own balance sheet in the wake of this deal, Citigroup has halved its quarterly dividend to $0.16 per share and plans to raise $10 billion in a forthcoming stock issuance.

Whoa. Your eyeballs should pop out of your head when you read that Wachovia could potentially cough up more than $42 billion in losses on $312 billion in assets; that's an astonishingly high number that demonstrates just how utterly dreadful the situation is for banks leveraged up with adjustable-rate mortgage products, as Wachovia is.

Ah, yes -- yet another week kicking off with absolutely crazy news. Will this week be as crazy as the last two? Stay tuned. We'll keep you updated as the day's developments unfold.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article.The Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (19)

Comments from our Foolish Readers

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  • Report this Comment On September 29, 2008, at 11:02 AM, mysoftballcoach wrote:

    I've been blogging about just this for a couple of weeks and the role the FDIC will play. (http://caps.fool.com/Blogs/ViewBlog.aspx?t=01007052586435812...

    There is more to come...much more, however most of the Big Targets have now been resolved.

    Interestingly, between 1986-1996, the last Banking crisis, Wells Fargo share price increased 600% and their dividend increased 400%. Watch for history to repeat.

    Coach

  • Report this Comment On September 29, 2008, at 12:42 PM, UltraContrarian wrote:

    Downey is next.

  • Report this Comment On September 29, 2008, at 2:28 PM, tumachar wrote:

    We will see.. in 1986 wells fargo did not have a mortgage lender. It purchased a pureplay mortgage lender after 1996.

    Surely, they will feel the pain. These days its hard to find someone who did did not have mortgage exposure.. JPM is probably the best candidate this time.

  • Report this Comment On September 29, 2008, at 3:31 PM, lluluien wrote:

    Here is the roll call vote from the House for resolution 3997 - the "Bailout". Now you can find out whether or not you need to call your Representative to tell him he's being voted out if he votes in favor of this again when it comes up for the next try. I already called Ike Skelton to tell him I'm voting for his opponent in the next election:

    http://clerk.house.gov/evs/2008/roll674.xml

  • Report this Comment On September 29, 2008, at 8:56 PM, GPmoney wrote:

    Banking establishments are more dangerous than standing armies. -Thomas Jefferson

  • Report this Comment On September 30, 2008, at 12:05 AM, realitycheck13 wrote:

    JUST SAY NO! By Steve Kendall

    Thank god they didn't pass the "bailout" plan! Buying up all the bad mortgage backed securities from all these crazy ___ mortgage banks is ridiculous. So what if the market went down 777, so what if we lost $1.4 trillion in market value today.

    We're here to build the future folks, take the damn never ending....

    continued at -

    www.mortgagebreakdown.com

  • Report this Comment On September 30, 2008, at 4:43 PM, robertf36009 wrote:

    We have seen larger paper losses before. Remember when the tech bubble burst? now those were real losses because those so called equities never came back. However unless you panicked and sold off your positions all you have to do is wait. I personnaly improved my positions in several companies yesterday and watched them rebound today. Fool on!

  • Report this Comment On October 03, 2008, at 7:35 PM, enet12001 wrote:

    I was sent an article from "The Motley Fool" titled "The ONE shock proof investment that just goes up." And "Just look at these gains last year from water technology companies..." The stocks and there last year gains that were listed in this article were as follows:

    CCC -- stock up 283%

    HDRX -- stock up 325%

    PNR -- stock up 528%

    WWAT -- stock up 630%

    I personally went back and check out these stocks via Bloomberg.com and none of them were even close to showing these gains, in fact HDRX closed the year as a loss.

    So what gives with these gentlemen and there newsletter? Would anyone from "The Motley Fool" please explain this to me?

    Thank you!

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