The FDIC’s open bank assistance procedures normally require the FDIC to find the cheapest way to rescue a failing bank

After a round of mediation between Geithner and Bair, the FDIC declared that Wachovia was «systemically important» to the health of the economy, and thus could not be allowed to fail. It was the first time the FDIC had made such a determination since the passage of a 1991 law allowing the FDIC to handle large bank failures on short notice. Later that night, in an FDIC-brokered deal, Citigroup agreed to buy Wachovia’s retail banking operations in an «open bank» transfer of ownership. The transaction would have been facilitated by the FDIC, with the concurrence of the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. Steel had little choice but to agree, and the decision was announced on the morning of September 29, roughly 45 minutes before the e the source of liquidity allowing Wachovia to continue to operate until the acquisition was complete.

In its announcement, the FDIC stressed that Wachovia did not fail and was not placed into receivership. In addition, the FDIC said that the agency would absorb Citigroup’s losses above $42 billion; Wachovia’s loan portfolio was valued at $312 billion. In exchange for assuming this risk, the FDIC would receive $12 billion in preferred stock and warrants from Citigroup. The transaction would have been an all-stock transfer, with Wachovia Corporation stockholders to have received stock from Citigroup, valuing Wachovia stock at about one dollar per share for a total transaction value of about $2.16 billion. Citigroup would have also assumed Wachovia’s senior and subordinated debt. Citigroup intended to sell ten billion dollars of new stock on the open market to recapitalize its purchased banking operations. The proposed closing date for the Wachovia purchase was by the end of the year, 2008.

However, when a bank is deemed «systemically important,» the FDIC is allowed to bypass this requirement

Wachovia expected to continue as a publicly traded company, retaining its retail brokerage arm, Wachovia Securities and Evergreen mutual funds. At the time, Wachovia Securities had 14,600 financial advisers and managed more than $1 trillion, third in the U.S. after Merrill Lynch and Citigroup’s Smith Barney.

The announcement drew some criticism from Wachovia stockholders who felt the dollar-per-share price was too cheap. Some of them planned to try to defeat the deal when it came up for shareholder approval. However, institutional investors such as mutual funds and pension funds controlled 73 percent of Wachovia’s stock; individual stockholders would have had to garner a significant amount of support from institutional shareholders to derail the sale. Also, several experts in corporate dealmaking told The Charlotte Observer that such a strategy is very risky since federal regulators helped broker the deal. One financial expert told the Observer that if Wachovia’s shareholders voted the deal down, the OCC could have simply seized Wachovia and placed it into the receivership of the FDIC, which would then sell it to Citigroup. Had this happened, Wachovia’s shareholders risked being completely wiped out.

Acquisition by Wells Fargo

Though Citigroup was providing the liquidity that allowed Wachovia to continue to operate, Wells Fargo and Wachovia announced on , that they had agreed to merge in an all-stock transaction requiring no government involvement. Wells Fargo announced it had agreed to acquire all of Wachovia for $15.1 billion in stock. Wachovia preferred the Wells Fargo deal because it would be worth more than the Citigroup deal and keep all of its businesses intact. Also, there is far less overlap between the banks, as Wells Fargo is dominant in the West and Midwest compared to the redundant footprint of Wachovia and Citibank along the East Coast. Both companies’ boards unanimously approved the merger on the night of October 2.