Wachovia, Citi, Wells Fargo to Halt Litigation

October 6, 2008

Wells Fargo & Co. and Citigroup Inc. agreed Monday to a 44-hour truce in their fight over regional bank Wachovia Corp. after a weekend of legal wrangling.

Wells Fargo and Citigroup have been battling over the bank since Wells Fargo announced an offer Friday that bested Citigroup’s proposal a week ago.

As part of their agreement on Monday to suspend all litigation, effective immediately, the three banks also said they would cease any formal discovery activities.

The increasingly bitter dispute has drawn in Federal Reserve officials looking to broker a deal. Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), said she expected an agreement “that serves the public interest” to be reached Monday, although the FDIC is not involved in the negotiations.

A person familiar with the situation said the various options discussed in the talks with the government included dividing up Wachovia between the two feuding companies. The source added that Wells Fargo would still like to buy all of Wachovia.

Citi, which announced a preliminary agreement to buy Wachovia’s banking assets for $2.2 billion a week ago, was considering an offer for the entire bank, among other options, a person close to Citi said.

The source said Citi has no appetite to buy Wachovia’s assets without some sort of government guarantee — unlike Wells Fargo, which made a $15 billion counterbid for the entire bank on Friday.

BLINKING FIRST

“Maybe they’re trying to get somebody to blink and say ‘I don’t really need it that bad,”‘ said Malcolm Polley, chief investment officer at Stewart Capital. He added that splitting the bank is unlikely to appeal to either company.

Some analysts also questioned whether Wells Fargo’s bid will cost the government less money than Citigroup’s.

Wells Fargo is taking advantage of changes the Internal Revenue Service had made in the tax treatment of write-downs when a bank is purchased. The changes allow the acquiring bank to recognize an immediate benefit from the write-downs, rather than recognizing them over multiple years.

Given the tax income from the Wells Fargo deal that the government would not receive, Stifel Nicolaus analysts see the cost to the government for either deal as being around $21 billion.

Citi said on Monday it is seeking more than $60 billion of damages from Wells Fargo. Citi said Wachovia would have collapsed on Sept. 30 without its agreement to acquire most of its assets.

Citi and Wells Fargo wrangled over the weekend over whether Wells Fargo’s offer violated Wachovia’s agreement to negotiate only with Citi.

Citi lawyers traveled to the Connecticut home of a New York judge on Saturday to obtain an order to extend its agreement to negotiate exclusively with Wachovia. An appeals court set aside the order, but the N.Y. judge subsequently re-extended the order.

The parties argued in Federal court as well, and a hearing slated for Tuesday was pushed back to Wednesday, after the cease-fire ends.

DEPOSITOR ANXIETY

Citi shares ended down 5.1 percent to $17.41 on worries it could lose the chance to increase its deposit base through a Wachovia takeover, while Wachovia dropped 6.9 percent to $5.78 on concern over the impact of a protracted legal battle.

Shares in Wells Fargo closed down 2.7 percent to $33.64 after Citi sued San Francisco-based Wells and Wachovia for breach of contract.

“A protracted legal squabble is in no one’s interest,” said Michael Farr, president of investment manager Farr, Miller & Washington. He said the uncertainty over Wachovia’s future will likely cause depositors to withdraw savings from the bank.

Some big investors, however, saw opportunities in the tumbling stocks. Speaking at an investor conference Monday, William Ackman, who runs New York-based Pershing Square Capital Management, said Wachovia is “an incredibly strategic asset” for either Citi or Wells Fargo. The hedge fund manager said he has 180 million shares in Wachovia.

Wells Fargo, the No. 7 U.S. bank by assets, has managed to remain profitable during the credit crunch, while Citi is looking to turn around its ailing business after posting about $60 billion in write-downs and losses during the last year.

(Additional reporting by Paritosh Bansal and Dan Wilchins, editing by Maureen Bavdek and Jeffrey Benkoe)

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