By Binyamin Appelbaum
Washington Post Staff Writer
Tuesday, October 7, 2008
The sides agreed to the truce under pressure from the Federal Reserve, which is eager for Wells Fargo and Citigroup to resolve their rival bids for control of the North Carolina bank. The extraordinary fight is unfolding amid general financial anxiety, and regulators want to avoid prolonged uncertainty about three of the nation's largest banks.
Citigroup agreed to buy most of Wachovia for about $2 billion early last week in a rescue orchestrated by federal regulators. Days later, Wells Fargo agreed to buy all of Wachovia for about $15 billion. Wachovia accepted the Wells Fargo deal because it appeared to be more lucrative for shareholders and would allow the company to be swallowed whole.
Wachovia is the largest bank in the Washington area.
The bank's deal with Wells Fargo provoked a furious reaction from Citigroup, which had signed an agreement with Wachovia to talk only with each other about a final merger agreement.
A series of lawsuits were filed, and hearings were scheduled for this week.
But under prodding from regulators, the firms are discussing options including allowing both Citigroup and Wells Fargo to buy pieces of Wachovia.
The sense of urgency was underscored by investors, who sold Citigroup's shares down 5 percent yesterday, to $17.41. Wells Fargo fell nearly 3 percent, to $33.64.
"We are pleased to participate with the Federal Reserve Board in a fair-minded, good-faith process to achieve a prompt and successful outcome," a Citigroup spokeswoman said.
Wachovia and Wells Fargo also said they supported a truce.
Federal regulators have told Wachovia that it must accept an offer soon because the bank has sustained massive losses on mortgage loans and lacks the money to stay in business. In a recent affidavit, Wachovia's chief executive Robert K. Steel said regulators told the bank that it was about to be seized immediately before Wachovia accepted the Citigroup offer, and again before Wachovia accepted the Wells Fargo offer on Friday.
A Wachovia collapse would impose formidable costs on the government, but rescuing the company will also be expensive.
Citigroup's initial deal for Wachovia relied on a commitment by the Federal Deposit Insurance Corp. to absorb all losses beyond $42 billion on a $312 billion portfolio of Wachovia's most troubled loans.
Wells Fargo's offer does not involve direct government support but instead takes advantage of a tax-rule change that would let the bank use Wachovia's losses to exempt its own profits from taxation. Stifel Nicolaus, a brokerage, yesterday estimated that the change would cause the government to lose $21 billion in tax revenue.
Citigroup could claim the same tax advantages against any future profit, although the company has not posted a profit since last fall.
Before the truce was declared, both sides had sought the help of their home-state courts.
Citigroup asked a New York court yesterday to suspend the Wells Fargo deal, force Wachovia to return to the bargaining table and award Citigroup more than $60 billion in damages.
"The Citi/Wachovia transaction would have been signed and announced on Friday, October 3rd if it had not been subverted by the unlawful conduct of Wachovia, Wells Fargo, and their officers and directors and outside advisors," the New York company said in a statement announcing the lawsuit.
To underscore the point, Citigroup delivered an agreement signed by its executives to Wachovia's lawyers in New York.
Meanwhile, a North Carolina judge issued an order restraining Citigroup from interfering in the Wells Fargo deal at the request of two Wachovia shareholders, one of them the company's former chief executive, Leslie Baker.
Wachovia also filed a suit in federal court Sunday seeking an order restraining Citigroup.
And U.S. Rep. Robin Hayes (R-N.C.) sent federal regulators a letter Friday, warning them against siding with Citigroup, on the grounds that the Wells Fargo deal was better for North Carolina.