While Congress begins formal debate on the $700 Billion bailout plan, the banking landscape is being transformed before their eyes. Another troubled bank, Wachovia, has seen their banking operations swallowed, this time by Citibank, in a deal structured to minimize insurance payouts made by the FDIC to depositors. Wachovia shares which closed at $10.00 on Friday were quoted down 90% in pre-trade activity which ndicates a sale made under duress. This news follows the seizure of Washington Mutual and its subsequent sale which occurred last week.
The Reuters article notes the following about the arrangement struck between Citigroup and the FDIC:
"The FDIC has entered into a loss-sharing arrangement on a pre-identified pool of loans," the agency said. "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."
How does this relate to student loans?
- Wachovia was the sixth largest originator of FFEL loans in FY07 with $2.9 billion of guarantees. While no announcement has been made, it would be presumed that their student loan operations would be absorbed by Citibank, which was the #2 FFELP lender with $4.8 billion of guarantees made in FY07. The combined entity had FFELP volumes of $7.7 billion in 2007, placing them behind Sallie Mae, which had $9.0 billion, according to Department of Education statistics.
- On the private loan side, Wachovia had significantly curtailed their activities in early August and completed a dramatic reorganization of their salesforce earlier this month.
In terms of how Wachovia borrowers will be handled in this acquisition, it is probably too early to tell, as there is probably not going to be a lot of information available. Financial aid administrators may want to have a contingency plan prepared should they need to find new lenders for their Wachovia borrowers. It would certainly be helpful if Citibank's Student Loan Corporation could provide guidance on their implementation plan to assist the financial aid community with this change.
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