Wachovia and Citigroup: Backdoor Bailout?

I own a small business, so I understand finance – to a point. I will fully admit I don’t completely understand the nuances of big banks, Wall Street, and high finance. With that said, I invite anyone out there to set me straight.

Wachovia is being bought by Citigroup. With the purchase comes some $312 billion in bad loans, but Citigroup is only on the hook for $42 billion. Buy a bank for pennies on the dollar and only responsible for 13% of the crappy loans. Not a bad deal.

Hmm, I wonder who’s ponying up the rest of the cash. Here’s an excerpt from an FDIC press release:

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

Now, it’s my understanding that the FDIC is funded by deposit insurance funds, but that will surely only go so far. Can the FDIC take on that much bad debt? Sounds like it can’t. Here’s an excerpt from a Reuters article from about a month ago:

“I would not rule out the possibility that at some point we may need to tap into (short-term) lines of credit with the Treasury for working capital, not to cover our losses,” Chairman Sheila Bair said in an interview with the paper.

With a rise in the number of troubled banks, the FDIC’s Deposit Insurance Fund used to repay insured deposits at failed banks has been drained. In a bid to replenish the $45.2 billion fund, Bair had said on Tuesday that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

WTF? “…a $45.2 billion fund?” We’re talking about them taking on $270 billion! I realize they’re talking about raising rates to cover it long term (and “not to cover losses”, if you believe that), but will the Fed ultimately fund this bailout buyout?

Sounds fishy, all the way around. Is this where we’re headed? The gub’mint buying up Wall Street through other banks? I mean, I’m powerless to stop it, obviously, but what does this mean in the long run?

Again, I understand enough about all this to be dangerous, but would love to know more…