Wachovia moves ahead with Wells Fargo

October 5, 2008 1:02:57 PM PDT
Wachovia Corp., at the center of a fight between Wells Fargo & Co. and Citigroup Inc. over who will buy the beleaugered bank, is moving ahead with its deal to sell itself to Wells Fargo -- while questions arise about the damaging effects that prolonged litigation might have on Wachovia.

Wachovia responded Sunday to a judge's order temporarily blocking the sale of the bank to Wells Fargo, saying it does not believe the order "has any effect on the validity of the Wells Fargo agreement with Wachovia."

Citi said in a statement announcing the ruling late Saturday it "is prepared to continue negotiations with Wachovia on the parties' previously agreed-to transaction."

New York State Supreme Court Justice Charles Ramos issued the order blocking the sale of Wachovia, which Wells Fargo had agreed to purchase in its entirety in a $14.8 billion deal. Citigroup accused Wells Fargo of trying to cut off its earlier takeover offer of Wachovia's banking operations for $2.1 billion in a deal struck with the assistance of the Federal Deposit Insurance Corp. On Friday, four days after that deal was struck, Wells Fargo said it was buying all of Charlotte, N.C.-based Wachovia.

In its request to Ramos, Citigroup invoked an exclusivity agreement in its agreement that bars Wachovia from talking with other potential buyers. In New York, the Supreme Court is a trial-level court; it was quite possible that ligitation among the three banks could go on for some time.

A protracted court fight raised the possibility that Wachovia, already hurt by billions of dollars in losses from failed mortgages, will further weaken. However, the government, which has closed and then seized failing banks including Washington Mutual Inc., the nation's largest thrift, would likely step in if the bank were in jeopardy.

Wachovia is among the banks whose billions of dollars in losses from bad mortgage bets ultimately led to the government's $700 billion plan to buy bad assets from banks and other institutions to shore up the financial industry.

"I would hope there would not be a long battle because that does not bode well for Wachovia's existing business," said Ben Halliburton, chief investment officer at Tradition Capital Management. "Any delays in action and uncertainty of who is going to own Wachovia ... just causes further problems for the operating entity."

Wachovia spokeswoman Christy Phillips-Brown said in a statement Sunday the company believes its agreement with San Francisco-based Wells Fargo is "proper, valid and ... in the best interest of shareholders, employees and the American taxpayers."

She said Citigroup is free to make a better offer to Wachovia under that agreement.

Wells Fargo said Sunday it has "a firm, binding merger agreement" with Wachovia.

"That agreement represents a transaction that, in stark contrast to Citigroup's proposal, provides significant and certain value to Wachovia shareholders, keeps Wachovia intact, is better for all of Wachovia's stakeholders including its employees and does not demand financial support from our government," the bank said, adding that it is confident that it will complete the deal.

"Nothing in the court's temporary order impacts our ability to ultimately do that."

The FDIC said Friday it "stands behind its previously announced agreement with Citigroup." It also said it would review all proposals and work with regulators of all three institutions to resolve the tug-of-war.

The government insurance agency held an auction for Wachovia that led to the announcement of the Citigroup deal a week ago. But Wachovia clearly wanted to be sold intact, and reached a deal with Wells Fargo, which had been among the companies vying for Wachovia. "This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Robert Steel, Wachovia's president and chief executive, said in a statement Friday.

The legal fight pits two of the largest remaining financial institutions against one another as the ongoing credit crisis leads the federal government to arrange marriages and sales among banking entities.

But not only does a legal battle delay Wachovia's saving, it could also be damaging to Citigroup, Halliburton said.

"I'm quite surprised that Citigroup would be agitating in this fashion, given that they themselves might need some government favors in the near future," Halliburton said, either for recapitalization or potentially to take over some other failed institution with the help of the FDIC.

"I can see why Citigroup wants it. I'm just surprised they don't recognize in all likelihood it's over."

Wachovia was a big originator of what are called option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months.

Wachovia and Citigroup are among the companies that have been forced to take billions of dollars in write-downs because of failed mortgages and mortgage-backed securities that have also plunged in value. The heavy losses led to the failure not only of WaMu and a number of smaller banks, but also the government-brokered sale of Bear Stearns Cos. to JPMorgan Chase & Co. and the bankuptcy filing of Lehman Brothers Holdings Inc.

New York-based Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the most write-downs of any U.S. bank.


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