Citigroup Walks Away From Wachovia Deal, But Wrangling Continues

NEW YORK — Wells Fargo emerged as the apparent victor in the battle for control of Wachovia bank Thursday night, after rival suitor Citigroup broke off talks with Wells Fargo and federal regulators but vowed to have its day in court.

While Citigroup said it plans to seek $60 billion in damages for breach of contract, it has decided not to challenge the Wells Fargo-Wachovia deal in court.

Wells Fargo said late Thursday it had ended talks with Citigroup and was moving ahead to acquire all of Wachovia's banking and other operations. It said the deal would not require aid from the Federal Deposit Insurance Corp. or any other government agency.

"We're pleased Citigroup has abandoned its efforts to interfere with Wachovia's planned merger with Wells Fargo," said Wachovia spokeswoman Christy Phillips-Brown in an e-mail to The Associated Press. "We look forward to completing our merger with Wells Fargo, which we have always believed is in the best interest of shareholders, employees, creditors and retirees as well as the American taxpayers, and it imposes no risk to the FDIC fund."

Wells Fargo said it expects the deal to be completed by the end of the fourth quarter. In a statement issued by the company, Wells Fargo Chairman Dick Kovacevich called the deal "an incredible fit."

In a brief statement, the Federal Reserve said that it would "immediately" begin consideration of the request by Wells Fargo to acquire Wachovia.

Citigroup backed out of negotiations with Fed officials and Wells Fargo on Thursday, ending a nearly weeklong battle for Wachovia Corp. after the banks failed to come to a resolution over how to split up the Charlotte, N.C.-based bank.

While Citigroup decided not to ask that the Wells Fargo deal with Wachovia be prohibited, Citigroup said it remains willing to complete its original deal with Wachovia.

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New York-based Citigroup said it believes it has strong legal claims against Wachovia, Wells Fargo, and their officers and directors for breach of contract and plans to pursue its claims "vigorously."

Citigroup came to the rescue of an ailing Wachovia when it agreed last Monday to buy Wachovia's banking operations for $2.1 billion in a deal brokered by the Federal Deposit Insurance Corp.

Slammed over the past year by defaulting mortgages, Wachovia was in considerable trouble. Wachovia disclosed in court documents that it agreed to the acquisition "with the understanding that a seizure of its banking assets later that day by the Federal Deposit Insurance Corp. would occur" unless it accepted Citigroup's proposal.

"We did not seek the Wachovia transaction; Wachovia brought it to us," said Citigroup Chief Executive Vikram Pandit in a statement.

Four days later, San Francisco-based Wells Fargo stunned Citigroup by announcing that Wachovia's board had agreed to an $11.7 billion all-stock offer. Originally, the deal was valued at $15.1 billion, or $7 a share, but Wells Fargo stock has declined since it was announced.

"Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened," Citigroup said in a statement. "We stood by while others walked away. Now, our shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

The battle for Wachovia moved to both state and federal court over the weekend. Citigroup charged that Wells Fargo violated an exclusivity agreement it had with Wachovia.

On Monday, the parties agreed to a legal standstill, which was extended on Wednesday and set to expire Friday morning.

Federal Reserve officials had been working this week with Citigroup and Wells Fargo to try and reach a quick resolution and avoid a lengthy court battle. But the parties could not come to an agreement on how to divide Wachovia's assets, including its risky mortgage and complex investment portfolios, according to two people close to the talks. The people agreed to speak on condition of anonymity due to the sensitivity of the matter.

In the end, Citigroup was not willing to take on more risk than the $42 billion in losses to which it had originally agreed, the sources said.

Under Citigroup's deal with Wachovia, the bank planned to assume $53 billion worth of debt and agreed to absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio. The FDIC agreed to cover any remaining losses in exchange for $12 billion in Citigroup preferred stock and warrants.

Wells Fargo, on the other hand, said it expected to take a $74 billion hit on Wachovia's $498 billion loan portfolio. The bank said it expects to incur the majority of credit costs in the next two years, and for the transaction to add meaningfully to earnings after that.

"It's definitely the best deal for Wachovia shareholders," said Sebastian Hindman, an analyst at SNL Financial. However, which bank ends up as the ultimate victor remains to be seen, he said.

"We'll probably find out six, nine, 12 months from now who really got the deal here," Hindman said. "Did Citigroup win out because they were able to walk away from this? And Wells Fargo, are they going to inevitably be able to withstand the losses from Wachovia?"

Wells Fargo, which has logged three straight quarters of profit declines, will likely benefit, though, from a new tax leeway from the Internal Revenue Service that allows companies to offset losses from companies they acquire with tax breaks. The potentially bigger tax offsets could boost the income of banks that buy other banks with losses from mortgage assets.

Subsequently, Wells Fargo plans to issue up to $20 billion of stock, primarily common stock, to maintain a strong capital position.

The combined company will have total deposits of $787 billion and more than 10,500 locations _ more than any other bank in the U.S.

While there is some overlap in states like California and Texas, the deal essentially opens up the entire East Coast to Wells Fargo, giving it a footprint in new markets such as New York and Miami.

In terms of total assets, a combined Wells Fargo-Wachovia would have $1.42 trillion in assets. As of June 30, Bank of America Corp. had $2.72 trillion in assets including those of Merrill Lynch & Co., which it is acquiring. Citigroup had $2.10 trillion and J.P. Morgan Chase & Co. had about $1.78 trillion, including Washington Mutual's assets.

Wells Fargo has been weathering one of the nation's worst credit crises much better than most of its competitors, in part because it had less exposure to the subprime mortgages whose failure has undermined the financial sector.

Wachovia shares jumped $1.28, or 36 percent, to $4.88 in after-hours trading. Wells Fargo shares gained 75 cents, or 2.8 percent, to $28, while Citigroup shares added 5 cents to $12.98.

Comments

[KillTheMessenger]

Totally trivial. Citibank had no case and emerged as a whiny loser. Just like everybody expected.

[Maschine]

Wonder how much money they were handed to walk away.

[KCFreedom]

I heard many complaints about Wells Fargo bank from relatives of mine in California, back in the 1980's.

Some of them kept moving their bank accounts to other banks because their banks kept getting taken over by WF. Once WF took over, their fees went up and they were basically priks. So now WF is a goliath of banking.

When I moved to Texas in the 1980's, the native banks sucked down there, compared to where I was from, but they got even worse when Reagan deregulated inter-state banking rules. Big out of state banks like NCNB came in and carpetbagged most of the big Texas banks, which were reeling from a recession from fallout of the oil industry. Then Texans had the same experience as my relatives in California, where the new bigger banks sucked even worse than the banks they took over.

Banking has been awful ever since Ronnie Reagan deregulated them. We all might as well stuff our money in our mattress, as it would be a better deal than trusting banks with our money. My own bank ensures I never come out ahead through the year. The interest is so low and transaction fees are so high, it never comes close to evening out.

[suec03]

I worked for Wells Fargo in their branches during the late 1980's when they were buying up other banks. They moved the acquired accounts to their existing branches, cherrypicked the best employees from the acquired branches, laying off the rest, and closed the branches of the acquired banks, unless their branches had more impressive architecture or were in better locations. It was our job to reassure the "new customers" to have confidence in their new bank. Monthly checking account fees were high, those with objections were offered ATM only accounts and charged a fee if they came inside the branch to make a deposit. Our part of Southern California is already saturated with in-store and freestanding Wells Fargo branches. I fear our two local Wachovia branches will be closed, or swapped for closing nearby Wells Fargo branches.

[EvilCartman]

Awwwwww Citigroup is not in the Old Boys Network anymore..... I guess Goldman Sachs - JPMorganChase put the kabosh on it.