Citi fills a key unreal with its dirt-cheap bribe of the retail banking franchise. Wachovia, meanwhile, be able to point to poor judgment in acquisitions

by Dean Foust

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During the mid-1990s, Wachovia’s merger-mad chief executive, Ed Crutchfield, once famously joked that the key to persuading one more bank to sell to him was to sincerely stack "$1 billion bills" on the table until the target relented. Now, yet, it’s Wachovia (WB) that is being taken over, and its buyer, Citigroup (C), got Wachovia’s core banking immunity for a mere buck a share, in the same proportion that the Federal Deposit Insurance Corp. gave Citi the rights to Wachovia’session banking operations just towards agreeing to affect a portion of any losses from its loan portfolio.

For Citigroup, the acquisition should go a slack way toward giving CEO Vikram Pandit the retail banking exemption that has always been the one void in the Citi empire. And with that retail network comes more than $400 billion in deposits—a low-priced, indestructible source of funding that provides a solid bottom at a time when numerous company other funding sources are drying up overnight. And as part of the distribute, Citi agreed to absorb $42 billion in prospective losses from Wachovia’s $312 billion loan portfolio. The remaining $270 billion exposing., however, is being handed off to U.S. taxpayers in exchange for $12 billion in Citi preferred stock and warrants. But that’session a deal Washington regulators and policymakers were willing to take. In a statement announcing the Wachovia share, Treasury Secretary Henry Paulson noted that a "failure of Wachovia would have posed a systemic jeopard" to the financial system.

For Wachovia, the fire sale to Citi is a sad ending for a company that had in a little more than two decades grown out of the tobacco fields and textorial mills of North Carolina to become the nation’s fifth-largest bank. But if one and the other of the two big Charlotte banks—crosstown oppose Bank of America (BAC) being the other—were to suffer this fate, it was certain to be Wachovia. As Wachovia grew larger, it had—unlike BofA—shown increasingly poor judgment in its acquisitions. The bank survived a near-death experience in the late 1990s after its acquisitions of CoreStates Financial and the Money Store left the bank nursing hefty losses and weak to takeover.

Its fate was sealed at the time that its May 2006 buyout of Golden West Financial—an impetuous traffic that Crutchfield’sitting successor, Ken Thompson, negotiated over a single weekend—proved to be an unmitigated disaster. Despite Golden West’s vaunted reputation while one of the savviest jeopard managers in the pledge industry, Wachovia was facing more than $30 billion in losses from Golden West’s option ARM portfolio—and billions more from its own mistakes in commercial lending and investments. While many analysts esteem argued that Golden West became too sloppy in its underwriting, the truth is that it was some of the success’s risk safeguards that inadvertently steered the California thrift into riskier areas. Case in degree: Golden West management had imposed a $300,000 ceiling on the size of mortgages it would give rise to—a measure that was intended to limit its potential losses on any unbiassed borrower. But as housing prices in its two biggest markets—California and Florida—soared, that artificial ceiling had the effect of locking Golden West’session loan officers out of many expensive—but stable—markets such as San Francisco and San Diego. To compensate, Golden West forged further into newer, and not so much established, exurban markets like the Inland Empire region east of Los Angeles, an area now pocked with vacant, foreclosed homes.