From the FDIC press release (September 28,2008):
"The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk."
Also from the press release:
"Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's 8,451 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations."
I'd like to know more about that pool of loans. This is an additional exposure of the Federal government to $270 billion in losses. If these were the worst assets Wachovia owned, a high percentage of this exposure may be realized. Remember, these guys invented the pick-a-payment loan.
This is not a case of a strong bank taking over a weak bank. This is a weak bank taking over a really weak bank. That $12 billion in preferred stock and warrants is likely to be worth zero in the end.
How long before the FDIC can no longer write "The FDIC receives no federal tax dollars – insured financial institutions fund its operations?"