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Tuesday, October 7, 2008

Duel in the Big Apple

When its $2.1 billion deal to purchase Wachovia Corp. was stalled by a counteroffer from Wells Fargo & Co., Citigroup Inc. cried foul – to the tune of a $60 billion "bad-faith" breach of contract suit against Wachovia and Wells Fargo. The suit was filed Oct. 6, 2008, with the New York State Supreme Court in Manhattan.

Citigroup and Wells Fargo both seek a controlling stake in Wachovia, the country's fourth-largest bank.

Suitor spurned

Citigroup intended to acquire the banking operations of the Charlotte, N.C.-based financial institution in a transaction facilitated by the Federal Deposit Insurance Corp.

Then Wells Fargo presented Wachovia with an offer to purchase all of Wachovia's banking operations for $14.8 billion. Wells Fargo indicated it would need no FDIC assistance to complete the takeover.

After agreeing to the Citigroup deal, Wachovia accepted the new deal with Wells Fargo, which set off a chain reaction of legal maneuverings.

Interests opposed

On Sat., Oct. 4, New York Supreme Court Judge Charles Ramos granted a request from Citigroup for additional time to complete the Wachovia deal. But on Sun., Oct. 5, the appellate division of the same court dismissed Ramos' order.

Simultaneously, Wachovia was in federal court asking U.S. District Judge John Koetl to declare the Citigroup deal invalid because provisions in the agreement restricted Wachovia from considering other bids or negotiating with other firms. Wachovia indicated it only agreed to the Citigroup deal "with the understanding the FDIC would seize its assets" unless it accepted Citigroup's proposal.

A Wachovia spokesman called the arrangement with Wells Fargo "proper, valid, and in the best interests of shareholders, employees and the American taxpayer." And Robert Steele, Wachovia's President and Chief Executive Officer, said the deal will enable Wachovia to remain intact, preserving the value of an integrated company without government support.

Compromise likely

Federal Reserve officials are negotiating with Wells Fargo and Citigroup in an attempt to get the titans to reach an agreement.

The FDIC intends to work with all three banks to resolve this legal tug of war. It said the banks are considering a deal that would ultimately split Wachovia's 3,346 branches along geographic lines.

All parties involved know a quick resolution is urgent: A prolonged court battle could further diminish Wachovia's stock value, which, according to Wachovia officials, has already been weakened by billions of dollars lost from failed mortgages.

"If it goes into a protracted legal battle, everybody loses," said Frederick Cannon, a Financial Analyst for Keefe, Bruyette and Woods Inc., a financial services consulting firm. "Wachovia is big enough that it would be a negative for the financial system. Given that situation, we will see a resolution pretty quickly." end of article

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