Yesterday's Citigroup-Wachovia deal and the federal bailout of Wall Street firms have raised plenty of big questions about the economy, the state of banking and the impact on everyday people.

UNC Charlotte finance professor Tony Plath is continuing to provide answers this afternoon. Got a question? Send an e-mail to nbell@charlotteobserver.com

Question: It seems to me the federal government's structural supports for banks are not being used to protect the banks from 1929-like failures. Instead, the FDIC, the Treasury, and The Federal Reserve with bank managements are allowing struggling banks to be sold at bargain basement values. JP Morgan and now Citicorp are purchasing "great" franchises with limited risk, and the shareholders of Wachovia and Washington Mutual are getting virtually nothing in return. Is this the vision we had when the FDIC was established? I thought the purpose of the FDIC was to protect banks from the kind of panic that leads to a run on deposits. Yet, reports in the Charlotte Observer and elsewhere attribute the collapse of Wamu & WB to a loss of confidence. Please help me understand this.

Plath: This one is a tough question, and the answer is a bit technical. It's true that the FDIC was established to protect bank depositors from loss, and thereby prevent the damage to banks caused by contagion in the marketplace. Unfortunately, our deposit insurance infrastructure was designed in the 1930s, and the sophistication of both our capital markets and the commercial bank participants in these markets has advanced exponentially since 1933. Quite simply, the deposit insurance fund isn't up to the task of saving modern-day banks from a liquidity crisis when these institutions fund a large percentage of their assets by issuing short-term debt in the capital market, rather than selling checking and savings deposits in the deposit market. That's what happened to Wachovia on Friday afternoon. The bank's $640 billion deposit base was relatively stable; the problem occurred in the bank's inability to refinance its short-term debt obligations in the capital market.

Compounding the liquidity problem facing the bank on Friday was the size of its deposit base (approximately $640 billion) relative to the size of the FDIC's reserve fund ($42 billion). If the FDIC had waited until all of the franchise value had been extinguished from the bank, a federal bailout of just the insured deposits would have cost the government far more than the level of reserves maintained by the FDIC to accommodate bank failures, which means the FDIC would have been forced to turn to the U.S. Treasury to redeem all of the bank's insured deposits. In addition, the uninsured depositors at Wachovia would have then faced an uncertain return of their investment, because the FDIC would first have to estimate the value of the failed bank's assets before it could pay a percentage of the total value of uninsured deposits out to depositors. These two effects would have caused significant disruption in financial markets that are already operating in crisis mode, perhaps triggering even more panic across the market. Rather than risk this sort of scenario, the FDIC acted quickly before Wachovia reached the point of total failure to protect both the insured and uninsured depositors of the bank by merging the bank's deposits into Citi's balance sheet. One casualty of the FDIC's quick action was the price paid by Citi to acquire the Wachovia franchise. An extremely motivated seller working in the shadow of the FDIC commands virtually no bargaining power in the M&A marketplace, which is why Wachovia shareholders received almost no value for their shares.

Question: Wachovia has a points reward program that every time you use their debit card as an credit card you accumulate points and can cash them in for rewards like gift cards and coupons. Should I cash in my Wachovia Rewards Possibilities that I have been accumulating to avoid losing them?

Plath: No. Given that the FDIC merged Wachovia into Citi without actually failing the bank first, using a resolution method called "Open Bank Assistance," all of the contractual arrangements established by Wachovia continue to exist under its new owner. Your Wachovia Reward Points are unaffected by the Citigroup acquisition, and use of your debit card will continue to award points under the original terms and conditions of the program. At some point in the future this may change, as Citi will have the option to renegotiate all of Wachovia's former deposit contracts and awards programs as the bank's new legal owner. But this will not occur for the next several months, and if Citi does decide to change the terms of the reward program, they are required to notify you of the change and gain your continuing approval of the program before they implement a change.

Question: How could Wachovia be a potential acquirer of Morgan Stanley a few days ago and now complete a fireside sale to Citi?

Plath: Wachovia's pending failure became evident in the market very quickly last Thursday, based on WaMu's failure and subsequent roll-over into JP Morgan. After WaMu failed, investors targeted for sale other banks with significant subprime loan exposure like Wachovia and National City, and news broke that S&P and Moody's were about to downgrade Wachovia's credit rating. With $3.4 billion in short-term debt up for refinancing on Monday, it quickly became apparent that the credit market would not allow Wachovia to refinance its debt at reasonable interest rates, and at that point the uninsured depositors in the bank are rumored to have started withdrawing their deposits (it's important to point out, however, that Wachovia's management denies this point). Without access to short-term credit and facing the possibility of increased withdrawals, Wachovia quickly faced a liquidity crisis by Friday afternoon. At that point the FDIC stepped in and arranged to merge the bank into a stronger partner with a continuing ability to issue short-term debt in the credit market. That partner turned out to be Citigroup.

The week before this turmoil occurred at Wachovia, the bank's access to short-term debt in the credit market seemed much more secure. At that point the bank discussed a potential merger with Morgan Stanley that would combine Wachovia's huge retail banking operation with Morgan's equally substantial investment banking operation, forming a universal bank that could rival competitors like Bank of America and JP Morgan in the market. The speed with which Wachovia fell in the last few days points out just how much turmoil exists in our present financial markets, and just how dangerous it is to operate in these markets for large institutions that have been weakened by significant subprime mortgage loan exposures on their balance sheets.

Question: If I have a checking account, 401k, mortgage or home equity line of credit with Wachovia, what changes can I expect to see?

Plath: Virtually none. The FDIC used a mechanism known as "Open Bank Assistance" to assist with the sale of Wachovia to Citigroup, which means that Wachovia never failed as a corporation prior to its sale to Citi. Rather, the FDIC assisted Wachovia in locating a buyer for the bank, and arranged to cover a large portion (amounting to $270 billion ) of Wachovia's questionable $312 billion mortgage portfolio in exchange for $12 billion worth of warrants for Citigroup's common and preferred stock. Given this form of federal assistance for the sale of Wachovia to Citi, all of the account relationships you currently maintain with Wachovia will remain unchanged after the bank's sale to Citigroup. Citi indicated yesterday that they have still not yet reached a decision regarding whether or not they will continue operating with the Wachovia brand name, so it's not yet clear whether your checks will eventually change to reflect the Citigroup corporate name, or whether deposit products will continue to display the Wachovia brand. We will likely learn more about Citi's plans for the Wachovia brand in the next several months, as the bank's new owner thinks through some of these issues.

Question: What do you forsee happening with the new Wachovia headquarters being built here?

Plath: That decision now rests with Vikram Pandit and the top management group at Citi. In all likelihood, the combined Citi-Wachovia will occupy a portion of the new building, but the combined firms' need for Uptown Class-A office space will be reduced from Wachovia's original plans. That will cause an increase in Uptown Charlotte's high-end office vacancy rate, and over time, the additional office space once planned to be occupied by legacy Wachovia operations will be occupied by other companies as Charlotte grows.

Question: How will the Wachovia-Citi deal affect the local economy here in Charlotte?

Plath: It's difficult to know the total impact right now, since the specific terms of Citi's acquisition of Wachovia are just being released to the public. We do know that the impact will be widespread and significantly negative here.

First, the local job cuts at Wachovia will likely run around 3,000 positions, including all of the top management jobs, and many of the administrative positions that accompany a headquarters facility.

Second, there will be a significant impact on the greater-Charlotte real estate market, concentrated particularly in the Uptown condominium market and some of our relatively newer upscale neighborhoods like Ballantyne and Piper Glen.

Third, many people in the Charlotte area own stock in Wachovia directly in their investment portfolios, or indirectly in their retirement accounts and/or mutual funds. Just about all of these investors will suffer a significant loss on their investment in Wachovia shares, and it will take many years of capital appreciation in Citigroup, Inc.'s common stock to recover these losses. Fourth, the economic impact from the loss of a large corporate headquarters will ripple throughout the Uptown financial community, and Citi replaces many of Wachovia's preferred suppliers, vendors, and consultants with Citi's preferred third-party supplier network. Finally, the loss of a large banking headquarters will have psychological consequences on the community, diminishing consumer confidence in the market and dimming expectations for growth in the regional economy.

We've never faced a structural economic change quite like this one, and it will likely take us an extended period of time to fully recover from Wachovia's loss here.