With the help of the U.S. Federal Deposit Insurance Corporation (FDIC), Citigroup will purchase all of Wachovia's banking assets, deposits, and parent company debt. Unlike the deal Washington Mutual made last week with J.P. Morgan Chase, debtholders and shareholders are not wiped out and Wachovia did not technically fail.

Wachovia shareholders are left with the bank's asset management arm, Evergreen Investments, and brokerage arm Wachovia Securities, which includes subsidiary A.G. Edwards. Citigroup will get Wachovia's massive retail operations (a great long-term business for the bank), wealth-management, and corporate and investment banking operations in exchange for dealing with Wachovia's troubled mortgage book, with a helping hand from the FDIC. As a part of the deal, Citigroup will absorb the first $42 billion of losses of Wachovia's $312 billion pool of loans (including the toxic $120 billion of pick-a-payment mortgage loans). If the losses exceed the $42 billion, the FDIC will take the hit rather than Citigroup. As compensation for this loan insurance, Citigroup is giving the FDIC $12 billion of preferred equity and warrants. With about $400 billion of assets to absorb, the equity issuance to the FDIC will have an additional benefit of helping support Citigroup's regulatory ratios.

While we think this will be an excellent deal for Citigroup, details are still sketchy at this point. Consequently, we are placing our fair value estimate under review until we can get more details and a chance to assess the impact this deal will have on Citigroup in the long run.