Actually, Citigroup (parent of Citibank, Travelers Insurance [see below], Salomon Smith Barney, and many other financial businesses) is buying the banking operations of Wachovia Bank, the nation's largest holder of so-called "option ARMS," the loans that let the borrower decide how much to pay back. (Washington Mutual was the second-largest holder; de mortuis nil nisi bonum.) Hidden in the MarketWatch description of the transaction was this little gem:
Citi will acquire more than $700 billion of assets of Wachovia's banking subsidiaries, and related liabilities. The Federal Deposit Insurance Corporation (FDIC) has agreed to provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets. Citi is responsible for the first $30 billion of losses on this portfolio, and expects to record these expected losses under purchase accounting upon closing of the transaction. Citi is also responsible for the next $12 billion in losses up to a maximum of $4 billion per year for the next three years. Citi has also agreed to issue to the FDIC preferred stock and warrants with a combined value of approximately $12 billion. The FDIC has agreed to be responsible for any further losses on this portfolio.
The ringer is the next-to-last sentence: in exchange for the guarantees that the FDIC is providing to Citi (is it Citi, Citicorp, Citibank, or Citigroup?), the FDIC is receiving $12 billion worth of stock and warrants in Citi. For comparison, the market value of Citi at today's close was about $96 billion. Warrants are the right to buy stock at a fixed price for a certain period, meaning that the FDIC has the right to buy a sizable interest in Citi if it wants to, for some time to come. This is the first step in Citigroup (or whatever it wants to call itself) becoming a de facto national bank, meaning a bank effectively controlled by the government. Andrew Jackson would roll over.
NOTE: A few hours after I posted this, a vice president of Travelers Insurance wrote to say that Citigroup spun off Travelers Property Casualty, which now operates as The Travelers Companies, Inc, and that Citigroup sold Travelers Life & Annuity to MetLife. Although Citigroup uses a rendition of the famous Travelers umbrella, simplified to a red curve, on some of its communications, the real umbrella (she wrote) isn't part of Citigroup any more. (In a delightful follow-up e-mail, she said that to get the real umbrella, I should buy some insurance from Travelers.)
