Wachovia taken over by Citigroup; the fear of the times?

On September 26, CNN Money had a post on Wachovia, of which two points fascinated IPBiz:

#1. Regardless, Wachovia looks to be in substantially better shape than Washington Mutual before WaMu failed. Wachovia has a loyal and largely affluent banking clientele, and a sizable business of offering investment services to clients through financial advisors. WaMu, by contrast, was a saving-and-loan, and had far fewer business lines.

What's more, Wachovia is hardly running out of capital, says Bush. [Nancy Bush, a bank analyst at NAB Research]

But a bank's being well capitalized, she said, "is no longer enough" to reassure nervous depositors.

AND

And yet Wachovia's bread-and-butter retail banking business, by contrast, may be moving in the opposite direction of WaMu's, even as Wachovia's stock slides amid fear.

Wachovia added 226,000 retail checking accounts in the second quarter, a Wachovia spokeswoman said, and a brow-raising 745,000 since June - or nearly a million new checking customers since the second quarter began. Wachovia held average deposits of $435.5 billion in the second quarter.

"We are focused on managing our company and serving our customers with excellence," a spokeswoman for the company said. "We are aggressively addressing our challenges and are working to strategically strengthen and manage capital and liquidity in this challenging environment."

#2. "Pick-a-pay"

But Wachovia also holds more than $122 billion in so-called Pick-A-Pay or Option ARM mortgages, as of July 22. Pick-A-Pays are an unwieldy type of loan that have fast become notorious for producing high levels of losses, as well as high levels of risk for banks that wrote them.

Wachovia's Pick-A-Pay loans give some borrowers the option of deferring portions of their monthly interest payments, thereby increasing their loans' balance. While Wachovia has stopped writing the loans altogether, Pick-A-Pays have proved highly problematic for both WaMu and Wachovia since home prices have fallen around the nation even as many Pick-A-Pay loan balances have risen.

Wachovia famously acquired the Pick-A-Pay business in 2006, when it purchased West Coast lender Golden West, at the height of the housing boom, for $25.5 billion.

That deal quickly has quickly come to haunt Wachovia's franchise. Defenders of Golden West, a pioneer in offering Option ARM mortgages, say that Wachovia changed the product's underwriting standards, and issued the loans to riskier borrowers. But employees at Wachovia who marketed Pick-A-Pays say that the loans do not deserve to be lumped with other risky loans, including now-infamous subprime loans.

Of course, as of Monday, September 29, this is all so much history. The New York Times reported the takeover of Wachovia by Citigroup:

The F.D.I.C. said that the agency would absorb losses from Wachovia above $42 billion and that it would receive $12 billion in preferred stock and warrants from Citigroup in return for assuming that risk.

“Wachovia did not fail,” the F.D.I.C. said, “rather it is to be acquired by Citigroup Inc. on an open-bank basis with assistance from the F.D.I.C.”

Under the deal, Citigroup will acquire most of Wachovia’s assets and liabilities, including $400 billion in deposits and will assume senior and subordinated debt of Wachovia, the F.D.I.C. said. Wachovia Corporation will continue to own the retail brokerage firm AG Edwards and the money management arm Evergreen.