Will Fed's Action Reignite Citi-WaMu Rumors?

The Federal Reserve Board of Governors has given Citigroup the green light to make "significant" acquisitions, saying the financial services giant has improved its compliance risk management program.

A year ago, the Fed ordered Citigroup "not to undertake significant expansion" because of concerns about its compliance program.

By giving Citigroup the go-ahead on large acquisitions, the Fed's ruling is fueling speculation that the bank might make a run at Washington Mutual, Seattle, the nation's largest thrift and third-largest mortgage banker. Citibank services $403.2 billion of home loans through its CitiMortgage subsidiary at the end of last year. WaMu, the nation's third largest servicer, managed a portfolio of $746.8 billion in home loans.

A March 3 letter written by William Rutledge, EVP of the Federal Reserve Bank of New York, said Citigroup has made "significant progress" in implementing a new compliance risk management program.

The 2005 order cited "deficiencies" in the bank's program, noting "a series of adverse compliance events in recent years."

Early last week, Cerberus Capital, New York, said it was buying 51% of General Motors Acceptance Corp. with two partners - Citigroup and Japanese Bank Aozora. GMAC owns the nation's fifth-largest mortgage banking company.

Over the past two years, rumors have surfaced that Citigroup was talking to WaMu about a possible deal. Both firms declined to comment on the talk, and some executives inside WaMu dismissed the rumors as industry gossip.

Late last week, WaMu's stock was trading up about 3%, approaching a new 52-week high.

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