As Suitors Fight Over Wachovia, Fed Tries for Deal
Monday, October 6, 2008
A high-stakes battle over who will gain control of the nation's fourth-largest bank intensified over the weekend, with the Federal Reserve acting as a go-between in the pursuit of Wachovia by both Citigroup and Wells Fargo.
Wachovia agreed Friday to be bought by Wells Fargo, spurning Citigroup, which had agreed to buy most of the troubled bank a few days earlier. As Citigroup and Wells Fargo mounted aggressive legal battles for Wachovia, the Fed stepped in to try to broker a compromise that would eliminate uncertainty over the future of the Charlotte, N.C.-based bank.
Leaders of the central bank fear that a lengthy legal battle over Wachovia could pose broad risks to the financial system. Fed officials in New York and Washington spent the weekend acting as conduits for communication between the three banks. Sources said the Fed's role was that of relaying information between the parties, not proposing specific solutions to the dispute. One possibility that emerged in the talks was that part of Wachovia would go to Citigroup and part to Wells Fargo.
Even as those conversations were occurring, an epic legal battle was shaping up that will proceed if no compromise can be found. A New York judge late Saturday night issued an order that Citigroup said suspended Wells Fargo's deal for Wachovia on the grounds that Wachovia already had betrothed itself to Citigroup and was not allowed to talk with other suitors. But yesterday evening, a New York state superior court blocked the Saturday ruling, leaving the legal issues unresolved pending further hearings.
Meanwhile, Wachovia filed a federal lawsuit yesterday seeking affirmation of its right to accept Wells Fargo's offer. Wells Fargo agreed to pay about $15 billion for all of Wachovia, a deal it prefers to Citigroup's offer of about $2 billion for most, but not all, of the company.
U.S. District Court Judge John G. Koeltl gave the sides until tomorrow to file arguments.
The matter may well be resolved out of court. The companies and federal regulators all have vested interests in a quick resolution, according to people familiar with the matter who spoke on condition of anonymity because they're not authorized to speak publicly. The fragile condition of the financial markets makes this a dangerous moment for uncertainty about three of the nation's largest banks.
The Fed has taken the lead among federal regulators in brokering an agreement, though the Treasury Department, Federal Deposit Insurance Corp., and others have also been heavily involved.
The companies staked out three contradictory public positions yesterday.
Citigroup and Wells Fargo both insisted that they held exclusive rights to Wachovia. Wells Fargo said it already had a deal. Citigroup said it was ready to resume negotiations.
Wachovia, however, kept a bit of distance from both suitors. The company affirmed its commitment to the Wells Fargo deal but said it was still willing to listen to Citigroup.
"Citigroup is always free to make a superior offer to Wachovia," the company said in a statement.
Wachovia needs to find a buyer because the company has been drained by massive losses on bad mortgage loans. Citigroup and Wells Fargo both expressed interest last weekend, but Wells Fargo walked away, forcing Wachovia to accept a minimal offer from Citigroup early Monday morning. However, the companies did not sign a merger agreement, instead they signed a letter promising to negotiate exclusively with each other.
Wells Fargo renewed its pursuit of Wachovia after a change in federal tax law that allows the company to use Wachovia's losses to shelter its own profits from taxation. And on Friday, Wells Fargo and Wachovia announced a merger agreement. The deal, if completed, would create a bank with branches from coast to coast rivaled only by J.P. Morgan Chase and Bank of America.
Citigroup's Saturday lawsuit alleged that Wachovia had broken the exclusivity agreement, and that Wells Fargo had knowingly interfered with a legal agreement. The company's filing made clear that Citigroup is reluctant to surrender a rare chance to gain a significant presence in retail banking. The large New York bank has traditionally focused on investment banking and overseas markets, but financial companies increasingly covet deposits as a cheap source of funding.
"The assets that Citigroup was to acquire from Wachovia cannot be acquired at any price elsewhere in the market," the filing said. "Without injunctive relief, Citigroup will forever lose this unique opportunity to acquire those assets."