Washington Post Staff Writers

Monday, September 29, 2008; 11:27 AM

Citigroup has agreed to buy Wachovia bank in a deal backstopped by taxpayers and brokered by the Federal Deposit Insurance Corp. to avoid another major corporate failure in the midst of the ongoing financial crisis.

Citigroup will pay the Charlotte-based Wachovia about $2.16 billion, or $1 per share, for its banking operations. Wachovia will retain its asset management and brokerage operations. Citigroup, based in New York, also will become the largest bank in the Washington area.

The deal protects all deposits at Wachovia, the FDIC said in a statement.

The purchase of Wachovia boosts Citigroup as a rival for Bank of America and J.P. Morgan Chase in the new coterie of financial behemoths that is emerging from the current financial crisis. Those three banks will now control almost a third of the nation's deposits.

"This gives us a dominant franchise in great markets," said Citigroup chief executive Vikram Pandit. He described the deal as offering a rare combination of high returns and low risk, because of the government's involvement.

Citigroupsaid it would raise $10 million in new capital to help it absorb Wachovia's troubled loan portfolio. Citigroup also plans to reduce by half the dividend on its shares, among the most widely-held stocks in America.

Federal officials pushed Wachovia to agree to a sale during a long weekend of talks with Citigroup and other bidders. The Charlotte company has been crushed by losses on mortgage loans, and regulators were increasingly concerned that it might collapse, forcing taxpayers to cover the losses of its depositors.

To make the deal work, the government agreed to limit Citigroup's possible losses on a $312 billion portfolio of Wachovia's most troubled loans. Citigroup took an immediate loss of $30 billion and agreed to absorb up to $12 billion in additional losses over the next three years.

Any additional losses will be absorbed by the FDIC, which in exchange will receive a $12 billion stake in Citigroup.

Citigroup executives said this morning on a conference call with investors that the government's participation created an "exceptional" deal for the company.

"Not only is this a high-opportunity deal for us, it's also a low risk transaction," Pandit said. He went on to explain that the risks has largely been shifted to the FDIC.

The Wachovia purchase is the second major bank buyout orchestrated by the FDIC in the past week. The agency also helped arrange the sale of the failed Washington Mutual to J.P. Morgan Chase.

FDIC Chairman Sheila Bair said in a statement that the action was "necessary to maintain confidence in the banking industry given current market conditions."

The FDIC statement emphasized that Wachovia "did not fail" and that its branches and other offices will be open as usual.

"Today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits," the FDIC statement said.

Federal officials pushed Wachovia to agree to a sale during a long weekend of talks with Citigroup and other bidders. The Charlotte company has been crushed by losses on mortgage loans, and regulators were increasingly concerned that it might collapse, forcing taxpayers to cover the losses of its depositors.

"On the whole, the commercial banking system in the United States remains well capitalized. This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury," Bair said in a statement.

Citigroup is buying Wachovia's banking operations from the Charlotte-based holding company. The deal leaves the holding company with two smaller subsidiaries, the A.G. Edwards brokerage franchise and the Evergreen Investments wealth management division.

Wachovia's success in recent years was widely admired by its rivals, and its financial health was considered superb. But it was crushed in recent months by losses on mortgage loans, suggesting how virulent the plague sweeping the financial system has become.

The company bought its troubles in 2006 with the $25 billion acquisition of Golden West Financial, a major mortgage lender based in California. Golden West specialized in "option" mortgage loans, which allow customers to pay less than the maximum each month, as on a credit card. High rates of borrower defaults have already crushed several of the largest option mortgage companies, including IndyMac Bancorp and Washington Mutual, which failed last week and was immediately bought by J.P. Morgan.

J.P. Morgan estimated that Washington Mutual had a loss rate of 20 percent on its mortgage portfolio.

Wachovia so far has acknowledged a loss rate of only 12 percent on its portfolio, leading many investors to conclude that the worst was yet to come. The company's stock has fallen 74 percent this year, to $10 a share, and is likely to fall sharply again this morning on news of the deal.