Citigroup to buy Wachovia's banking units, halve dividend

Wachovia wb became the latest banking giant to be stung hard Monday when it agreed to sell most of its operations to Citigroup c in a deal brokered by the Federal Deposit Insurance Corp.

The deal appears to have come at a cost to all parties as Citigroup, to shore up its capital position, said it will sell $10 billion in common stock and cut its quarterly dividend in half to 16 cents a share.

Citigroup agreed to absorb $42 billion in losses from Wachovia's $312 billion loan portfolio, with the FDIC covering any remaining losses. Citigroup will issue $12 billion in preferred stock and warrants to the FDIC.

The FDIC emphasized that Wachovia didn't fail and that all depositors are protected.

"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits," FDIC Chairman Sheila Bair said. "There will be no interruption in services and bank customers should expect business as usual."

Citigroup will acquire most of Wachovia's assets and liabilities. Wachovia will continue to own AG Edwards, a brokerage firm, and Evergreen Investments, an investment management company, and will continue as a publicly traded company.

Wachovia's financial problems stem from its acquisition of Golden West Financial in 2006 for roughly $25 billion. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of "pick-a-payment loans," which let borrowers skip some payments.

Concerns about Wachovia's financial health have hammered the company's stock in recent days. On Friday, Wachovia's stock closed Friday at $10, down 74% for the year. Even as details of its takeover unfolded, Wachovia shares plunged in Monday premarket trading less than $1.

On Thursday, the FDIC brokered the sale of Washington Mutual, the nation's largest savings and loan, to JPMorgan Chase.

The continuing consolidation threatens to leave only four giant banks standing: Bank of America bac, JPMorgan jpm, Citigroup and Wells Fargo wfc.

Going forward, strong banks will press their advantage with new products and services, says Jim Eckenrode, and executive at TowerGroup, a research and advisory services firm for the financial services industry.

But that creates opportunity for small and medium size banks who focus on community and small business banking, says Jay Sidhu, former CEO of Sovereign Bancorp, who now runs Sidhu Special Purpose Capital out of Reading, Pa.

Sidhu says smaller banks are poised to prosper, and he intends to invest at least $250 million in them in upcoming months. "Capital and superior management will be the key for survival and growth in this environment," he says.

Treasury Secretary Henry Paulson said the Wachovia sale to Citigroup would "mitigate potential market disruptions. In this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy," Paulson said.

This may be the end of the troubled large banks, but there were 117 banks and thrifts in trouble during the second quarter, the highest level since 2003, the FDIC says.