Now It's Wachovia's Turn

The banking crisis of the past several months has had one common thread: As soon as the bank in the spotlight goes under, a wave of negative attention immediately shifts to who's next.

After Bear Stearns' fallout in March, all attention shifted to Lehman Brothers. After Lehman Brothers failed, all attention shifted to AIG (NYSE: AIG). After AIG was bailed out, all attention shifted to Washington Mutual (NYSE: WM).

Now that WaMu's gone, Wachovia (NYSE: WB) seems to be the victim of the day. Shares were virtually decimated this morning after Citigroup (NYSE: C) made a last-second deal to take over its banking operations after a weekend-long bidding war with Wells Fargo (NYSE: WFC). What's this mean for shareholders? Nothing good. Citigroup will pay out a scant $2.16 billion worth of its own stock, which equates to around $1 per share, give or take.

Technically, Wachovia did not fail. As if it was acting to dispel fear that banks are dropping like flies, the FDIC specifically stated, "Wachovia did not fail; rather, it is to be acquired by Citigroup … on an open bank basis with assistance from the FDIC."

Yada, yada, yada … the best way to translate that is to assume it would have failed rather quickly had a deal not gone through. The FDIC is the organization that insures bank deposits in the event a bank fails; the fact that it stepped in to help Citigroup take over Wachovia's operations is testament to how dire the banking-industry situation is these days.

For example, this morning's press release states:

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.

In return, the FDIC will receive $12 billion in preferred shares and warrants. To shore up its own balance sheet in the wake of this deal, Citigroup has halved its quarterly dividend to $0.16 per share and plans to raise $10 billion in a forthcoming stock issuance.

Whoa. Your eyeballs should pop out of your head when you read that Wachovia could potentially cough up more than $42 billion in losses on $312 billion in assets; that's an astonishingly high number that demonstrates just how utterly dreadful the situation is for banks leveraged up with adjustable-rate mortgage products, as Wachovia is.

Ah, yes -- yet another week kicking off with absolutely crazy news. Will this week be as crazy as the last two? Stay tuned. We'll keep you updated as the day's developments unfold.