Wachovia buyout has some local customers worried

MEMPHIS, TN (WMC-TV) - The sale of banking giant Wachovia to CitiGroup Monday had some in the Mid-South worried.

Wachovia customer Frederick Dotson said he couldn't believe it when he heard the announcement.

"I was really surprised and shocked," Dotson said.

The deal greatly expands Citigroup's retail franchise - giving it a total of more than 4,300 U.S. branches and $600 billion in deposits - and secures its place among the U.S. banking industry's Big Three, along with ank of America Corp. and JPMorgan Chase & Co.

Wachovia, like Washington Mutual Inc., which was seized by the federal government last week, was a big originator of option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.

Charles Burkett, president of banking for First Tennessee, said the impact of the sale on Memphis and Shelby County should be minimal.

"Wachovia had 15 or 16 branches across the state, compared to our 200," Burkett said.

But some worried CitiGroup may eventually downsize or sell off local branches, and worried about the effect the sale would have on financial services.

"It's always a challenge when someone comes in and acquires another bank or financial services company, because a lot of times during that transition there will be a drop in services," Burkett said. "Quite frankly, that opens opportunities for us."

Monday, Wachovia employees in Shelby County worried about layoffs, saying they could not get through to the company's corporate office to find out about benefits and pensions.  A CitiGroup spokesperson said the only change Wachovia customers will see is a different name on all correspondence.

The Wachovia acquisition caps a wave of unprecedented upheaval in the financial sector in the past six months that has redefined the banking industry, starting with the government-led forced sale of Bear Stearns Cos. to JPMorgan in March.

The failure of IndyMac Bancorp in July reignited investors' fears about the stability of the financial sector, which led to the eventual takeover of struggling mortgage lenders Fannie Mae and Freddie Mac. Earlier this month, officials seized both Fannie and Freddie, temporarily putting them in a government conservatorship, replacing their chief executives and taking a financial stake in the mortgage finance companies.

After U.S. regulators made it clear that they would not bail out struggling investment bank Lehman Brothers Holdings Inc., rival Merrill Lynch & Co. arranged a hasty deal to be bought by Bank of America Corp. for $50 billion in stock.

Lehman Brothers was subsequently forced to declare bankruptcy, the largest ever in the United States. Investor concerns quickly turned to American International Group Inc., the nation's largest insurer. Staving off a failure that could have sent shock waves throughout the global markets, the federal government injected an $85 billion emergency loan into the insurer.

Just days later, the government seized Seattle-based Washington Mutual, marking the largest bank failure in U.S. history. WaMu's deposits and assets were acquired by JPMorgan for just $1.9 billion.

These events have now culminated in extraordinary moves by the federal government to try to fix the financial crisis that began more than a year ago.

Wachovia's problems stem largely from its acquisition of Golden West Financial for $24.3 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip their monthly interest payments for extended periods. These so-called "option-ARM" loans were highly profitable until home prices began to decline around the same time Wachovia took control of Golden West and its World Savings franchise in October 2006.

The eroding home values triggered provisions that forced more option-ARM borrowers to make their full monthly payments - a burden that caused a growing number of households to default on the loans, saddling Wachovia with lethal losses.

Golden West's ties to the mortgage mess represent an ironic twist for Herbert and Marion Sandler, the husband-and-wife team that ran Golden West for more than 40 years before personally raking in more than $2 billion in the Wachovia sale.

The Sandlers raged against the excesses that led to the savings-and-loan crisis of the 1980s, a crusade that helped give them a reputation as the voices of reason in an industry that had spiraled out of control.

An effort to reach the Sandlers through their charitable foundation was unsuccessful Monday.

This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs - mostly in its mortgage business - and slashed its dividend. Wachovia also boosted its provision for loan losses to $5.57 billion during the second quarter, up from $179 million in the year-ago period.

The remainder of Wachovia will include its asset management, retail brokerage and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises. It will continue to be a public company under the Wachovia name.

On Monday, S&P cut its counterparty credit rating on Wachovia Corp. to "BBB-" from "A+." A rating of "BBB-" is one notch above junk status. S&P also placed all of the ratings on Wachovia and its bank subsidiary on watch for possible downgrade.

The Associated Press contributed to this report.

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