Citigroup acquires retail bank arm of Wachovia

Citigroup agreed yesterday to buy the retail banking operations of Wachovia in a deal brokered and backstopped by the US government which had become fearful by the end of last week that the Charlotte-based bank, once admired for its management and fat balance sheet, was on the brink of collapse.

The takeover was one more symptom of the extraordinary upheavals in the financial sector and takes the concomitant consolidation of the sector one step further. Citigroup, JP Morgan Chase and Bank of America now control almost one third of all deposits in the United States. JP Morgan Chase recently bought Washington Mutual. Bank of America has swallowed Merrill Lynch.

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Citigroup was coaxed into the deal by officials of the Federal Deposit Insurance Corporation, the agency responsible for protecting account holders from bank failures. Under the agreement, Citigroup will absorb up to $42bn (£23.3bn) of Wachovia losses but the agency will be responsible for losses beyond that in a loss pool of $312bn. In return, it will receive $12bn of Citigroup preferred stock.

Wachovia "did not fail", the FDIC insisted. "Today's action will ensure seamless continuity of service from their bank and full protection for all their deposits." The deal came just four days after JP Morgan Chase intervened to save Washington Mutual, another giant American bank hitting the wall.

The retail banking landscape in America continues to change faster than the autumn colours. The deal should be a source of relief to Wachovia customers. "There will be no interruption in services, and bank customers should expect business as usual," FDIC chairwoman Sheila Bair said.

Citigroup, whose shares rose slightly on news of the deal, is acquiring Wachovia's banking operations for $2.1bn in stock and it will assume another $53bn of Wachovia debt. The Wachovia holding company will retain its brokerage and investment banking operations, AG Edwards and Evergreen Investments.

As the credit contagion has spread, Wachovia found itself crushed by losses on mortgage loans, many of which it acquired with the purchase in 2006 of California-based Golden West Financial.