NEW YORK — Citigroup Inc. agreed on Monday to buy Wachovia Corp.'s banking operations, in a dramatic rescue of a giant lender hurt by bad mortgages amid turmoil in global credit markets.
The $2.16-billion all-stock transaction was brokered by the Federal Deposit Insurance Corp. Shares of Wachovia lost much of their value, while Citigroup shares fell, though by less than many rivals, after the US House of Representatives rejected a controversial $700 billion US financial industry bailout.
Wachovia is the latest casualty of a crisis that has led to shotgun sales of Bear Stearns Co.s and Merrill Lynch & Co. Inc., the near-collapse of American International Group Inc., and the bankruptcies of Lehman Brothers Holdings Inc. and Washington Mutual Inc.
The purchase gives Citigroup chief executive Vikram Pandit 4,365 branches and more than $600 billion of US deposits, making it a power in an area where it was undersized relative to rivals. Citigroup's branch network would trail only those of Bank of America and JPMorgan Chase & Co., which bought Washington Mutual's banking unit last week.
"The deal seems to be a big win for Citigroup," wrote CreditSights Inc. analyst David Hendler. "It will finally have access to a sizable core deposit base in its domestic market."
The Wachovia purchase includes retail and investment bank operations, and values the lender at roughly $1 per share. Wachovia, the sixth-largest US bank by assets, had seen its market value tumble from $112 billion in February 2007.
New York-based Citigroup will absorb as much as $42 billion of losses on Wachovia's $312-billion loan portfolio, with the FDIC taking on any further losses in exchange for $12 billion of Citi preferred stock and warrants.
Citigroup said it would take on $53 billion of Wachovia senior and subordinated debt as well as trust preferred securities, cut its own quarterly dividend in half to 16 cents per share, and raise $10 billion worth of capital.
Wachovia will retain its Evergreen asset management unit and its Wachovia Securities brokerage, which includes the former A.G. Edwards Inc. Robert Steel remains chief executive, a position he has held since July.
Citigroup expects to close the transaction by yearend. Spokeswoman Christina Pretto said it was too soon to comment on integration plans. A Wachovia spokeswoman did not immediately return a call seeking comment.
In late afternoon trading, Citigroup shares were down $1.15 to $19, while Wachovia's shares slid $8.11, or about 81 percent, to about $1.89.
Citigroup expects the transaction to add to earnings in 2010 and result in $3.7 billion of charges.
The transaction was struck in consultation with the Fed, the Department of Treasury and President George W. Bush. Wachovia depositors will be fully protected, and the FDIC said it does not expect its deposit insurance fund to be affected.
Wells Fargo & Co. also had tried to buy parts of Wachovia, people familiar with the process said.
Adding Wachovia will give Citigroup roughly $2.9 trillion worth of assets, slightly more than Bank of America Corp. would have after buying Merrill Lynch.
"This combination creates a dominant US franchise in great markets," Citigroup chief Vikram Pandit said in a conference call.
Citigroup plans to close less than five percent of the combined company's branches.
It was not immediately clear how many jobs might be cut. Citigroup has been slashing its own work force; chief financial officer Gary Crittenden said it had cut 10,000 jobs since June, for a total of 23,000 cuts this year.
Despite losing $17.4 billion in the past three quarters, Citigroup said it expected capital levels to remain strong after the Wachovia transaction.
Crittenden said third-quarter earnings should be weaker than the second quarter but better than the first, reflecting $1.5 billion of write-downs tied to subprime debt, leveraged loans, and monoline insurers and $1.7 billion on structured investment vehicles.
Moody's Investors Service and Standard & Poor's said they might cut Citigroup's credit ratings.
