SAN FRANCISCO – A report of a possible deal between Wachovia Corp. and Citigroup, Inc. surfaced late Friday after Wachovia shares lost a quarter of their value in regular trades on concerns the bank may take another big mortgage-related write down.

A sale to Citigroup would make Wachovia the latest victim of the ongoing credit crisis, with the bank succumbing to the triple threat of falling real estate prices, over aggressive lending and panic in the credit markets.

Discussions are in the early stages and there’s no certainty any merger will be hammered out, according to the New York Times.

Wachovia, recently the fourth biggest U.S. bank by assets and one of the 40 largest banks in the world, saw its stock give up $3.70 to close at $10. Shares are down 80 percent in the past year.

Shares of National City Corp., another troubled mortgage lender, dropped 26 percent to close at $3.71.

A deal to nab Wachovia would follow closely on the heels of the failure of Washington Mutual, Inc., whose assets and deposits J.P. Morgan Chase acquired Thursday for about $2 billion.

If sold, Wachovia, with assets of $812.43 billion, would topple Washington Mutual as the largest bank failure in the nation’s history.

WaMu had assets of about $309 billion when it went under.

Before WaMu, Continental Illinois National Bank & Trust was, for more than 20 years, the largest bank failure in U.S. history. It had $40 billion of assets when it failed in 1984.

Wachovia’s downfall was hastened by the collapse in real estate prices and exacerbated by its aggressive lending practices, which grew further when the firm bought Golden West, a major lender in California, in May 2006.

Wachovia became the nation’s largest originator of so-called “option ARMs” when it paid almost $26 billion for Golden West in May of $2007.

Since 2001, Wachovia has acquired 5 financial firms; Golden West, Westcorp, SouthTrust, Metropolitan West Securities and A.G. Edwards, for a total of more than $45 billion.

The firm also merged with the Prudential Securities unit Prudential Financial in 2003.

And, as recently as July, Wachovia warned that losses from its risky Pick-A-Pay option ARM mortgages, which have saddled Wachovia with spiking loan losses, would continue to rise into 2009.

Option ARMs were marketed to borrowers via low introductory rates and included various payment options. The loans often included the option to pay only interest, which caused the borrowers debt to grow with each payment, becoming negative amortization loans.

When housing prices began to fall just at the time rates were adjusting higher on those loans, borrowers began defaulting at alarming rates, leading to big losses for Wachovia and others who had extended the credit or purchased securities based on the credits.

Since the subprime mortgage crisis began last year, the widespread credit crunch and economic malaise has claimed numerous victims, including large Wall Street brokerages such as Lehman Brothers Holdings Inc., and insurance giant American International Group Inc. The economic woes have also resulted in the failure of 12 banks so far this year.

Wachovia would make for 13 total.

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