WASHINGTON: Citigroup yesterday agreed to a takeover of troubled Wachovia’s banking operations in a deal backed by regulators that gives the US government a stake in one of the nation’s biggest banks.

The government-engineered rescue marks another shakeup for the troubled US banking sector saddled with heavy losses from the bursting of the real estate bubble and a related credit crunch.

It came as Wachovia, the fourth-largest US bank by assets, faced a near collapse of its share price and weakening confidence because of its exposure to the subprime mortgage crisis.

The orchestrated Wachovia deal came as the lawmakers began debate on a massive $700-billion Wall Street bailout a day after President George W. Bush’s administration and Congressional leaders struck a tentative deal.

“Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC,” the Federal Deposit Insurance Corp. (FDIC), the banking industry regulator, said.

Under the takeover agreement, the government obtains a stake in the country’s largest US bank by total deposits in exchange for guaranteeing a large portion of the distressed Wachovia assets linked to housing.

New York-based Citigroup will assume up to $42 billion of losses from a pool of $312 billion of loans held by Wachovia; the FDIC will absorb losses beyond that and take a stake in Citigroup for the guarantee.

Citigroup granted the FDIC $12 billion in preferred stock and warrants to compensate the agency for bearing this risk.

Citigroup will pay $2.16 billion in stock to Wachovia and assume the senior and subordinated debt of Wachovia Corporation, the companies said.

Citi said it expected to raise $10 billion in common shares to help finance the transaction.

Citigroup said the takeover would create a leading retail bank with a 9.8 percent share of the US market deposit sector, and total deposits of $1.3 trillion. Wachovia had $812 billion in assets at the end of June.

The takeover was orchestrated with the Federal Reserve and Treasury Secretary Henry Paulson, in consultation with Bush, the FDIC said.

The participants “determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability,” the FDIC said.

Paulson, in a separate statement, said: “I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk.”

Shares in Wachovia had plunged in recent days as investors feared there would be a panic run on the beleaguered bank, as had occurred to its rival, savings and loan bank Washington Mutual, before its demise. WaMu was seized by the government and sold to investment bank J.P. Morgan Chase late Thursday in what was the biggest-ever US bank failure.

The $700 billion bailout legislation, unveiled Sunday as the fruit of tough talks among Democratic and Republican leaders and the White House five weeks before the Nov. 4 US elections, would represent the biggest government economic intervention since the 1930s Great Depression. It aims to shore up the economy after the bursting of a US housing bubble ravaged the global banking system 14 months ago and dried up credit. The FDIC noted that Wachovia depositors were “fully protected” under its federal guarantee of bank deposits up to $100,000 and the transaction was not expected to cost the Deposit Insurance Fund.

The Federal Bank of Richmond said it stood ready “to provide liquidity as needed.”

Under the agreement, Citigroup will acquire the bulk of the Charlotte, North Carolina-based Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt. Wachovia Corp. will remain a public company with two main operating subsidiaries: Brokerage firm Wachovia Securities and Evergreen Asset Management. The transaction is expected to close before year-end. It has been approved by directors of both companies and is subject to shareholder approval of Wachovia and the appropriate regulatory approvals.

“This acquisition will change Citigroup’s focus, with a best-of-breed branch network across a huge geographic footprint,” said Bart Narter, analyst at Celent.

Shares in Citigroup surged 2.48 percent to $20.65 around 1500 GMT, bucking a steep Wall Street sell-off amid concerns that the Wall Street bailout plan may not avert a wider economic collapse.