The Lowdown on Wachovia-Citi

Update – 9:50 am (30th) – S&P still rates Wachovia a hold with a new price target of $2.50, which has already been crossed today. The stock opened at $2.30 and is moving higher.

Update – 6:55 pm – Looks like stocks are all higher in after market trading, Wachovia is nearly at $2. This post also appeared on seeking alpha here, read through the comments for other ways of valuing Wachovia. Personally I’m not happy with this deal at all but we’ll find out if it was justified based on what Citibank (the worst possible canditate for this) reports in the future. Even though Feds tried to make it clear that Wachovia did not ‘fail’, that is what it appears like – A forced failure of Wachovia.

Update – 3:24 pm – WB started trading about half an hour ago and is currently trading at $1.75, making me a couple ot thousand $ poorer not counting the rest of the bloodbath today, thanks to the house voting against the bailout. This probably means that the Fed might have to broker more deals. My estimate of Wachovia’s value was about 4$/share after this stupid deal plus 1$ of Citibank stock = a total of $5

Update – 12:56 pm – “The last sale on the NYSE for Wachovia was at the market close on Friday at $10,” said Scott Peterson, a spokesman for NYSE Regulation. As for when the stock was expected to open, Peterson said, “We are in consultation with the company now. Stay tuned.”
End Update

Update – 12:41 pm – I’ve heard conflicting reports on whether the Wealth Management Unit is included in the Citigroup deal or not. More later.
End Update

As a Wachovia investor, I was shocked by this mornings news – too much too fast. Anyway here is what I got from all the news in the morning.

Citi takes over Wachovia banking/mortgage business: Citi pays Wachovia $2.1 billion in stock in exchange for Wachovia’s banking and mortgage assets (over 700 billion in deposits+assets). Citi also assumes about 53 billion in debt. Citi needs to cover losses upto $42 billion on mortgage related losses. Anything beyond that is guarateed by the Federal govt. In exchange for that guarantee, the Feds get $12 billion in preferred Citi stock which pays 6% interest – possibly a sweet deal for the Feds. Wachovias over 300 billion mortgage portfolio had about 120 billion in option-ARM mortgages and expected losses on about 14% of those loans but really, is the deal justified?

Wachovia keeps the other businesses: Wacovia Securities, Evergreen Investments, Wachovia Insurance Services and Wachovia Wealth Management will remain part of Wachovia. The question here is how much is the remaining Wachovia worth now? Wachovia securities is the nations second largest investment firm, Wachovia Insurance Services is the 12th largest insurance brokerage and Evergreen Investments is Americas 29th largest asset management company. So now each Wachovia share is worth $1 from Citibanks 2.1 billion + whatever these businesses are worth.

In pre market trading, even before any details were announced, Wachovia stock dropped 90% and trading was halted at the NYSE on WB for the day. In spite of everything S&P still maintains it’s hold rating on WB but will revise it’s price target.

What does all this mean for you – well, I’m not even sure this whole Wachovia mess was necessary in the face of the bailout. But the question facing us now is – is the bailout necessary in the the face of this deal?? Your deposits at both Citi and Wachovia are safe and FDIC doesn’t need to spend anything here. Your local Wachovia will soon become a Citibank and Citibank plans on moving it’s banking headquarters to Charlotte, NC while keeping it’s investment headquarters in NYC. Since Citi and Wachovia don’t have much of an overlap in branches, not much is expected to change for depositors.

I will update this post, with more details as they unravel.

2 thoughts on “The Lowdown on Wachovia-Citi

  1. paul says:

    wow. wells fargo.
    That is better and it still stays a bank?

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