Stressing that no bank failure was imminent, the Federal Deposit Insurance Corp. said on Monday morning before market open that Citigroup Inc. (C) will acquire substantially all of Wachovia Corp. (WB). "Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC," regulators said in a press statement. Citigroup Inc. will acquire the bulk of Wachovia's assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp, the FDIC said; Wachovia will continue to own AG Edwards and Evergreen, and will remain its own separate public company. Wachovia said that it "expects to have adequate capital to support its remaining businesses." While Wachovia did not formally fail, the FDIC said it had entered into a loss sharing arrangement on a pre-identified pool of loans, although which loans were party to the agreement were not specified. Under the agreement, Citi will absorb up to $42 billion of losses on a $312 billion pool of loans, and the FDIC will absorb all losses beyond that point. Citigroup granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing the risk of loss beyond the initial write-off; not surprisingly, shares in Citi were off more than 7 percent in pre-market trading as a result, at $18.73 when this story was published. FDIC officials said the took the unusual move of backstopping the deal after consulting with the President and Treasury secretary Henry Paulson, noting that "open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability." In other words, waiting for Wachovia to fail wasn't an option. Wachovia’s now-infamous pick-a-pay loans ended up being its undoing. Option ARMs constitute $122.2 billion of the bank’s $488.2 billion in total loans; no other U.S. bank has as much exposure to option ARMs in real-dollar terms. "On the whole, the commercial banking system in the United States remains well capitalized. This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury," FDIC chairman Sheila Bair said. "This action was necessary to maintain confidence in the banking industry given current financial market conditions." Read the FDIC's statement >> Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.