IN the latest development of the widening global financial crisis, Citigroup Inc will acquire the banking operations of Wachovia Corp in a deal aided by the government agency that insures the United States' bank deposits.

Citigroup will absorb up to US$42 billion of losses in the deal, with the Federal Deposit Insurance Corp covering any remaining losses, the US government agency said yesterday. Citigroup also will grant the FDIC US$12 billion in preferred stock and warrants.

The deal greatly expands Citigroup's retail outlets and leaves it among the American banking industry's Big Three, with Bank of America Corp and JP Morgan Chase & Co.

The deal comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co both were reportedly studying the books of Wachovia, which was suffering from mounting mortgage losses linked to its ill-timed 2006 acquisition of lender Golden West Financial Corp.

The FDIC asserted that Wachovia didn't fail, and that all depositors are protected and there will be no cost to the Deposit Insurance Fund.

Federal Reserve Chairman Ben Bernanke yesterday said he supports the "timely actions" taken by the FDIC "which demonstrate our government's unwavering commitment to financial and economic stability."

Treasury Secretary Henry Paulson also welcomed the sale of Wachovia to Citigroup, saying it would "mitigate potential market disruptions." Paulson said he agreed with the FDIC and the Fed that a "failure of Wachovia would have posed a systemic risk" to the nation's financial system.

"As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy," Paulson said.