Citigroup and FDIC save Wachovia

Worldwide banking remained in turmoil Monday as Wachovia wb became the latest giant to topple, agreeing to sell most of its operations to Citigroup c in a deal brokered by the Federal Deposit Insurance Corp.

All deposits in Wachovia are protected, even those with accounts in excess of the $100,000 FDIC insurance.

"Today's action will ensure seamless continuity of service from their bank and full protection for 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, but Wachovia will continue to own brokerage A.G. Edwards and investment manager Evergreen Investments. Charlotte-based Wachovia will also continue as a publicly traded company.

Concerns about Wachovia's financial health have hammered the company's share price. Friday, Wachovia closed at $10, off 81% from its 52-week high. By Monday's close, Wachovia had slumped to $1.84.

Wachovia's financial problems can be traced to its 2006, $24 billion acquisition of Golden West Financial. Wachovia inherited a deteriorating $122 billion portfolio of loans that let borrowers skip some payments. Wachovia posted a $9.1 billion loss for the second quarter, slashed its dividend and announced plans to cut 11,350 jobs, mostly in its mortgage business.

Havoc across the Atlantic

Wachovia may be the last big bank considered to be in immediate trouble, but fears continue to spread among the next-tier regional banks.

Havoc also reached across the Atlantic Monday, where Britain nationalized Bradford & Bingley, Britain's ninth-largest mortgage lender. It was the second U.K. bank to be taken on by the British government. Also, Belgium, the Netherlands and Luxembourg pumped $16.4 billion into Fortis to stabilize Belgium's largest financial services firm, taking on a 49% stake.

Elsewhere:

•Morgan Stanley ms said it would sell a 21% stake to Japan's Mitsubishi UFJ Financial Group for $9 billion to shore up its finances. Even so, Morgan Stanley stock closed down 15% to $20.99.

•Lehman Bros., which became the largest bankruptcy filing in U.S. history on Sept. 15, said it would sell its investment management business to private-equity firms Bain Capital Partners and Hellman & Friedman for $2.2 billion.

The Wachovia deal came just four days after the FDIC brokered the sale of Washington Mutual, the nation's largest savings and loan, to JPMorgan Chase.

"Citigroup passed over Washington Mutual because they were focused on a bigger target: Wachovia," says Bart Narter of Celent, a Boston-based financial research and consulting firm. He says the deal makes Citigroup an instant player in the Southeast and Mid-Atlantic states. It will add 731 branches in Florida, 323 in North Carolina, 320 in New Jersey and 309 in Pennsylvania, Narter says.

Citigroup, in an effort to shore up its capital position, said it will sell $10 billion in common stock and cut its quarterly dividend 50%, to 16 cents a share. Citigroup paid $2.1 billion for Wachovia and 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.

Citigroup lost 12% to $17.75.

Continuing consolidation leaves four giant banks: Bank of America, bac JPMorgan Chase, jpm Citigroup and Wells Fargo. wfc Going forward, they will press their advantage with new products and services, says Jim Eckenrode, an executive at TowerGroup, a research and advisory services firm for the financial services industry.

Donn Vickrey, chief analyst at Gradient Analytics, a stock research firm in Scottsdale, Ariz., says that as the country is left with few large banks, consumers can expect lower yields on savings and higher fees.

Banks will likely offer expanded services to big customers such as managers of large assets. "For the average consumer, it's going to be a bad deal," Vickrey says.

Consolidation could create opportunity for small and midsize banks, which focus on community and small-business banking, says Jay Sidhu, former CEO of Sovereign Bancorp, which runs Sidhu Special Purpose Capital out of Reading, Pa.

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

Regional bank stocks slammed

Whatever their prospects, regional bank stocks sank in the broad market's Monday slide.

Sovereign Bancorp sov tumbled 72% to $2.33. Fifth Third Bancorp fitb sank 44% to $9.11; FirstFed Financial fed dropped 25% to $7.50; and KeyCorp slumped 33% to $9.80. The Financial Select Sector SPDR (ticker: XLF), a fund that holds 85 large-company financial stocks, dropped 13%.

There were 117 banks and thrifts in trouble during the second quarter, the highest level since 2003, the FDIC says, but that number could climb. "There are a number of regional banks which may need help, either because of the weakening mortgage market or simply because of the weakening economy," Michael Sheldon, chief market strategist of RDM Financial Group, told the Associated Press.

This year, 13 banks have failed. Aside from Washington Mutual, two others failed this month: Ameribank and Silver State Bank. Only three banks failed in 2007, and none failed in 2005 and 2006, the FDIC says.

Contributing: Paul Davidson