Citi Buys Wachovia Banking Operations

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Updated from 11:07 a.m. EDT.

Citigroup (C) on Monday said it would acquire Wachovia's (WB) banking operations for $2.16 billion and warned that the continued deterioration in consumer credit has had a "significant" negative impact on profits this quarter.

Citi said it will assume all of Wachovia's senior and subordinated debt, totaling approximately $53 billion, in the all-stock deal brokered by the Federal Deposit Insurance Corp. Wachovia's banking operations includes its retail bank, corporate and investment bank and wealth management business. Wachovia will retain is retail brokerage and asset management business.

The FDIC in a press release stressed that Wachovia did not fail. Citi will take the hit for up to $42 billion of losses on $312 billion of Wachovia loans identified as potentially troubling exposure, while the FDIC will take responsibilities for additional losses. Citi granted the FDIC $12 billion in preferred stock and warrants for assuming the risk.

Additionally, Citi said that it would raise $10 billion in common stock and cut its quarterly dividend in half to 16 cents a share. Citi's Tier-1 capital ratio is expected to be 8.8% upon completion of the deal, it said.

"This is a historic day and this is a historic transaction," Citi CEO Vikram Pandit said on a conference call. The combination "is good for both Citigroup and Wachovia. It's great for our clients and customers and I believe it's great for the U.S. financial system.

"This combination creates a dominant U.S. franchise," Pandit said. "We have contained the risk in this transaction so not only is this a high-opportunity deal for us, it's also a low-risk transaction. ... The transaction supports our goal to build a franchise with a high-annuity like earnings stream with controlled risk."