Citi Buys Wachovia Banking Operations

FDIC Chairwoman Shelia Bair said the government's participation in the deal will not come at a cost to the Deposit Insurance Fund.

"On the whole, the commercial banking system in the United States remains well capitalized," she said in a statement. "This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury. This action was necessary to maintain confidence in the banking industry given current financial market conditions."

Treasury Secretary Henry Paulson said a failure of Wachovia "would have posed a systemic risk."

"As a result of this transaction, all Wachovia depositors will be protected and Wachovia's senior and subordinated debt will be assumed by Citigroup," Paulson said. "The FDIC's actions help to mitigate potential systemic risk to our financial system. As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy."

Last week, reports had surfaced that Wachovia had been in talks with Citi as well as Banco Santander (STD Quote) and Wells Fargo (WFC Quote).

That came a week after the bank had been in talks with Morgan Stanley (MS Quote) about a possible merger. Those negotiations ended after Morgan Stanley changed its status to a bank holding company and said that Mitsubishi UFJ (MTU Quote) agreed to take a 21% stake in the firm.

Amid worries about its financial health, Wachovia saw its shares plunge nearly 40% Friday, the day after the failure of Washington Mutual (WM Quote) and the subsequent sale of its banking operations to JPMorgan Chase (JPM Quote).