Wachovia presses Wells Fargo deal

Wachovia Corp., at the center of a fight between Wells Fargo & Co. and Citigroup Inc. over who will buy the beleaguered 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 yesterday filed a lawsuit asking a federal judge in Manhattan to allow the Wells Fargo deal to go through.

Late Saturday, New York State Supreme Court Justice Charles Ramos had issued an order blocking the sale of Wachovia, which Wells Fargo had agreed to purchase in its entirety in a $14.8 billion deal.

Citigroup had already agreed to buy Wachovia’s banking operations for $2.1 billion.

Wells Fargo: Wachovia Deal To Move Ahead

"We are pleased that the unfounded order entered (Saturday) has been vacated," Wells Fargo said in a statement late Sunday. "Wells Fargo will continue working toward the completion of its firm, binding merger agreement with Wachovia."

On Saturday, Justice Charles Ramos of New York State's Supreme Court temporarily blocked Wells Fargo's planned purchase of the Charlotte, N.C.-based Wachovia.

Early last week, Citigroup announced it would acquire Wachovia's banking operations for $2.16 billion. Citigroup's deal needed the help of the Federal Deposit Insurance Corp., which had agreed to assume most of the risk of Wachovia's loan portfolio.

But on Friday, Wells Fargo announced it would purchase all of Wachovia in a stock-for-stock deal totaling $15.1 billion, or $7 a share. The deal requires no federal assistance.

Meanwhile, the Wall Street Journal reports Federal Reserve officials were pushing for Citigroup and Wells Fargo to reach a compromise. The effort could result in carving up Wachovia between its two suitors, the Journal reports, citing people familiar with the situation.

Under a plan being discussed Sunday night, Citigroup and Wells Fargo would divide Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the Northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California. Wells Fargo also would take over Wachovia's asset-management and brokerage units, the Journal reports.

The plans being discussed Sunday night don't involve either Citigroup or Wells Fargo receiving financial assistance from the U.S. government, according to the Journal.

The talks ended late Sunday with no resolution, but were expected to resume Monday morning.

Bailout Fallout

LOS ANGELES If there were any doubts about whether the tremors from Wall Street would spread uptown to Madison Avenue, the events of last week dispelled them.

Banking failures and buyouts involving Washington Mutual and Wachovia sparked wildly volatile developments involving five ad agencies and nearly $300 million in combined ad expenditures.

Last Monday, JPMorgan Chase stopped an old-fashioned run on Washington Mutual with a takeover. Almost immediately, the reskinning of the latter's Web site began (branches are to follow with new signage), signaling the beginning of the end of a WaMu rebranding effort began just months ago by Omnicom Group's TBWA\Chiat\Day, Playa del Rey, Calif., the bank's agency of scarcely a year.

TBWA\C\D faces the prospect of losing the entire account practically overnight. The business, worth $135 million, per Nielsen Monitor-Plus, would presumably be picked up by Chase's lead agency, independent mcgarrybowen in New York.

TBWA\C\D and WaMu executives declined comment. It was not clear if the agency is owed money for ads it already created or, if so, how much. Omnicom Media Group handles media for the client.

["With] WaMu and Wachovia, no amount of due diligence would have protected you," said Mike Sheldon, president of Interpublic Group's Deutsch/LA in Marina del Rey, Calif. "How can an ad agency outsmart people who do this for a living?"

The week also left the immediate future of WaMu's creative in question. By Wednesday night, a WaMu print ad appeared with the headline, "We love Chase. And not just because they have a trillion dollars." According to a source, mcgarrybowen crafted the ad using the template of TBWA\C\D's campaign.

Chase declined to address speculation that mcgarrybowen might inherit the business. Working with mcgarrybowen and other agencies, JPMorgan Chase spent $355 million on advertising in 2007, per Nielsen Monitor-Plus.

Bidding for Wachovia, meanwhile, came less than one business day after a team led by WPP Group's Ogilvy & Mather, New York, had won a protracted review for its $145 million ad business. The uncertainty about the future of that account was compounded by the interest of not one but two suitors: Citigroup and Wells Fargo.

Citi approached Charlotte, N.C.-based Wachovia first. But by Friday, Wells Fargo said that it, not Citi, would buy the bank, with no government help. However, with its position reportedly backed by the FDIC, Citi threatened a lawsuit against Wachovia and also mulled a higher offer to purchase it.

Ogilvy, meanwhile, was left in limbo. Sources estimated its pitch might have cost the agency more than $250,000. The agency declined to comment.

The Wells Fargo offer did nothing to improve Ogilvy's chances of keeping the business. In fact, Wells might be less committed than Citi to allowing the Wachovia brand to remain intact. As part of its initial approach, Citi suggested in a call to investors that the Wachovia brand might survive in some form because several Wachovia divisions were not part of the deal and because Wachovia's branches outnumber Citi's three to one. By contrast, Wells Fargo said it would buy all of Wachovia divisions.
The agency assignment will depend upon the outcome. If some divisions retain the Wachovia name -- such as Wachovia Securities, which has also advertised substantially in the past -- the business could conceivably be split between Ogilvy and Citi's agency, Publicis USA. But sources indicated that even if Ogilvy were offered a consolation prize, it might not wish to become conflicted in the financial category for a smaller slice of pie.

If Wells Fargo's offer prevails, its agency, Omnicom's DDB L.A. in Venice, Calif., not Publicis, could be handed the new banking entity's account. "[The agency assignment] is undetermined at this point," said Mary Beth Navarro, a Wachovia rep.

Executives at Publicis declined to comment.

The "What's in a name?" question is becoming more and more pertinent following such financial-brand consolidations. One source wondered if Merrill Lynch would even return as Merrill Lynch after its acquisition by Bank of America goes through. "At first you'd think they'd be crazy to kill that brand name," said the source. "But what if the name no longer inspires investor confidence?"

If Wells Fargo prevails for Wachovia, DDB will live by a sword it has died by in the past. Former subprime lender Ameriquest spent $310 million at its peak in 2003 as DDB was taking it "from 8-by-10 envelope direct-mail pieces to two Super Bowls," recalled Mark Monteiro, the shop's chief creative officer. "When the end comes, you just have to man up and deal with it," said Monteiro.

DDB president Nick Bishop would only say: "We are very excited about Wells Fargo's continued strength and stability, given all the uncertainty in the financial markets."

Outright losses to agencies, rather than account shifts, started to rack up with the subprime mortgage meltdown. Countrywide, for example, built its ad spending from $10 million in 2003 to $400 million in 2007 before it was suddenly absorbed by BofA. AIG, which spent $150 million on ads in 2007, bought 21st Century Insurance, robbing $25-30 million from shops like IPG's Sedgwick Rd., before AIG itself became embroiled in the liquidity crisis, threatening the future of M&C Saatchi, New York, on that account.

"I've never seen so much loss of faith in financial institutions," said Russel Wohlwerth, principal at consultancy Ark Advisors in Playa del Rey. But he sees a positive side, too: fewer reviews. "I don't think we're going to see CEOs worrying about changing agencies to get a new campaign," he said.

Court Temporarily Halts Citigroup Exclusivity Agreement With Wachovia

A North Carolina court issued a temporary restraining order Sunday preventing Citigroup Inc. from enforcing an "exclusivity agreement" it signed with Wachovia as part of a $2.1 billion deal to buy the Charlotte, N.C. bank.

One of the plaintiffs in the case was Leslie "Bud" Baker, Wachovia's former chief executive officer. A North Carolina Superior Court, in issuing the order, said "there is significant evidence that Citigroup has taken and continues to take actions designed to cause the seizure or collapse of Wachovia."

Wachovia shareholders "will be irreparably harmed" without immediate action from the court, said the judge presiding in the case.

Following the announcement of the Wells Fargo-Wachovia combination last Friday, "Citigroup has taken steps apparently designed to cause the Wachovia/Wells Fargo merger to fail."

Fed Pushes to Resolve Wachovia Deal Dispute

In a sign that the federal government is worried about the volatile battle for Wachovia Corp., officials from the Federal Reserve were pushing for Citigroup Inc. and Wells Fargo & Co. to reach a compromise. The effort could result in carving up the Charlotte, N.C., bank between its two suitors, people familiar with the situation said.

Under the leading plan being discussed Sunday night, Citigroup and Wells Fargo would divvy up Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the Northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California, according to people familiar with the talks. Wells Fargo would also take over Wachovia's asset-management and brokerage units.

Unlike Citigroup's original agreement to take over Wachovia's banking assets, in which the Federal Deposit Insurance Corp. agreed to shoulder potentially hundreds of billions of dollars in toxic loans, the plans being discussed Sunday night don't entail either buyer receiving financial assistance from the U.S. government, according to people briefed on the talks.

The talks ended late Sunday night with no resolution, but were expected to resume Monday morning, according to a person familiar with the matter.

The fact that Citigroup and Wells Fargo are duking it out for Wachovia, which was seen as in perilous condition barely a week ago, ought to be an encouraging sign for the shaky U.S. banking industry. But the second straight weekend of frantic negotiations also highlights how vulnerable the industry is to panicky customers and how the government is increasingly playing a significant role in the fate of major financial institutions.

Even as negotiations to split up Wachovia were proceeding, lawyers for Wachovia and Citigroup were sparring in court over the validity of an "exclusivity agreement" Wachovia had signed when it agreed to sell its banking business to Citigroup for $2.1 billion. A New York state appeals court Sunday night reversed a lower-court ruling from the day before that had extended the expiration of that agreement to Friday from Monday.

Citigroup, which contends Wachovia reneged on the binding deal, said it would appeal the decision that reversed the lower court's ruling.

But the legal back-and-forth didn't appear to derail the discussions about splitting up Wachovia, said people familiar with the matter. Regulators and bankers are scrambling to quickly end the drama in part out of concern that if Wachovia remains in limbo when U.S. markets open Monday morning, it could further spook already jittery investors and bank customers.

Regulators seemed to be focusing their powers of persuasion on Citigroup and Wells Fargo, going so far as to often exclude Wachovia from the weekend talks even though Wachovia shareholders would presumably need to bless a sale.

The weekend negotiations were being led by senior Federal Reserve officials. The Treasury Department was also involved, but Secretary Henry Paulson recused himself from the talks because of his ties to Wachovia Chief Executive Robert Steel, a former top Treasury official before taking Wachovia's helm in July, according to a person familiar with the matter.

Without some sort of compromise, the fate of Wachovia could drag out for weeks or months in a legal battle that leaves the battered bank in limbo, distracted by controversy and further weakened by the mountain of bad loans that led to its government-engineered deal with Citigroup a week ago.

After agreeing in principle to a shotgun marriage early last Monday morning, Citigroup and Wachovia spent the next several days trying to hammer out the specifics of the deal, which called for Wachovia shareholders to receive just $1 a share for most of the company.

On Wednesday, New York-based Citigroup offered to boost the amount it was paying to buy most of Wachovia, and that proposal remains on the table, according to people familiar with the matter. The terms of that revamped proposal weren't clear and were delivered before Wells Fargo's surprise offer on Thursday night.

People close to Wachovia confirmed that Citigroup made a newer offer and that it did go before the board. But these people said the offer was still "many dollars" lower than Wells Fargo's bid, that it was not for the whole company, and that Citigroup wanted Wachovia to reassume certain liabilities.

Also, a person close to Wachovia said as late as Thursday that Citigroup was still trying to renegotiate terms that had been agreed to verbally by the banks' two chief executives, Citigroup's Vikram Pandit and Wachovia's Mr. Steel, including the ultimate location of the retail-banking operations, severance and certain benefits.

Illustrating the competing interests at play, a sworn affidavit filed this weekend in federal court by Mr. Steel paints a picture in which the eighth-largest U.S. bank in stock-market value is caught between two takeover bids while facing pressure from the FDIC to sell itself. The affidavit suggests that Wachovia has come within inches of failing at least twice during the past week.

The affidavit also suggests that the FDIC has pushed Mr. Steel toward the Wells Fargo deal, as the government would be taken off the hook for any future losses. The FDIC declined to comment on the affidavit.

Mr. Steel's 57-page filing says that the Sept. 25 failure of Washington Mutual Inc. and the uncertainty about the bailout legislation "resulted in significant downward pressure in the market on the price of Wachovia stock."

The next day, Wachovia and Citigroup entered into their "exclusivity agreement" about a possible acquisition. Wells Fargo and Wachovia entered into a similar agreement the same day.

On Saturday night, Citigroup persuaded a New York state trial-court judge to extend the exclusivity agreement signed by Wachovia and Citigroup until Friday, according to Wachovia lawyer David Boies. Lawyers for Citigroup visited the judge, Charles Ramos, at his beach home in Cornwall, Conn., without anyone from Wachovia initially present, according to people familiar with the matter. Toward the end of the meeting, Wachovia's general counsel was allowed to dial in by phone.

Wachovia and Wells Fargo sought to overturn Judge Ramos's ruling. On Sunday, the company went to state appellate court to try to get the order overruled. Wachovia questioned the manner in which Judge Ramos issued the Saturday-night restraining order. A U.S. District Court judge didn't rule on the dispute Sunday but did say both sides had until an Oct. 7 hearing to submit briefs.

On Sunday night, a state appeals-court judge overturned Judge Ramos's ruling extending the duration of the exclusivity agreement. "I believe substantial questions have been raised regarding the authority of Justice Ramos to have issued the order while physically located outside the state of New York," Associate Justice James McGuire said in his ruling.

The exclusivity agreement restricted Wachovia from entering into merger discussions with any other bank. But a provision in the federal financial-system bailout added a wrinkle to the situation, rendering unenforceable certain agreements that restrict merger talks between banks.

The provision was inserted into the rescue legislation last week, at the behest of the FDIC, according to people familiar with the matter. Lawyers said the clause appears to defang the exclusivity pact between Wachovia and Citigroup.

A spokesman for Wells Fargo, Larry Haeg, said the bank believes the statutory language "invalidates Wachovia's claimed exclusivity agreement with Citi." But Mr. Haeg said the bank had "no role in suggesting the language."

Citigroup officials were caught off-guard by the provision, with senior officials not being aware of it until Friday afternoon -- after President George W. Bush had signed the bill into law. Citigroup executives argued that the provision also could invalidate Wachovia's subsequent deal with Wells Fargo -- an assertion that those banks dismissed.

Mecklenburg County Court Issues Temporary Restraining Order Against Citigroup

Order Enjoins Citigroup From Continuing to Take any Action to Enforce Terms of Exclusivity Limitations against Wachovia or Wells Fargo

Mary Louise Guttmann and Leslie M. ("Bud") Baker, shareholders of Wachovia Corporation, announced that the Mecklenburg County General Court of Justice, Superior Court Division, today issued a temporary restraining order prohibiting Citigroup, Inc. from taking any action to enforce any of the provisions regarding the exclusivity limitations in the letter agreement between the two companies dated September 29, 2008. In addition, the Court's order prohibits Citigroup from filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the exclusivity limitations; making public representations about the validity of the exclusivity limitations; and making public representations about the invalidity of the Wachovia/Wells Fargo merger agreement.

Ms. Guttmann and Mr. Baker said, "We are delighted that Judge Robert Johnston has agreed that Citigroup should be prohibited from attempting to enforce what it has incorrectly claimed were lawful exclusivity provisions in the letter agreement between Wachovia and Citigroup.

"We are especially pleased that Judge Johnston directed Citigroup to take no action attempting to utilize those provisions, or to make any public statement that casts doubt on the validity of the Wachovia/Wells Fargo merger agreement.

"Furthermore, we commend Wachovia's Board of Directors for putting the interests of shareholders first by accepting the superior proposal from Wells Fargo.

"We look forward to the opportunity to vote on the Wachovia/ Wells Fargo merger."

Affidavit Suggests Wachovia Neared Failure

A sworn affidavit filed this weekend in federal court by Wachovia Corp. Chief Executive Robert K. Steel paints a picture of a perilous situation in which the eighth-largest U.S. bank in stock-market value was caught between competing takeover bids while facing enormous pressure from the Federal Deposit Insurance Corp. to sell itself.

The affidavit suggests that Wachovia has come close to failing at least twice in the last week. Were the Charlotte, N.C., bank to collapse, it would rank as by far the largest failure of a federally insured bank in U.S. history.

The filing also suggests that the FDIC pushed Mr. Steel toward making a deal with Wells Fargo, based in San Francisco. Upending Wachovia's initial pact with Citigroup Inc. would let the government off the hook for its agreement to absorb certain future loan losses at Wachovia.

In the 57-page filing, Mr. Steel, a former Treasury Department undersecretary and Goldman Sachs Group Inc. executive, said the Sept. 25 failure of Washington Mutual Inc. and that week's uncertainty about the bailout legislation in Washington "resulted in significant downward pressure in the market on the price of Wachovia stock."

The next day, Wachovia and Citigroup entered into a confidentiality agreement about a possible acquisition. Wachovia and Wells Fargo entered into a similar agreement the same day.

On Saturday, Sept. 27, Wells Fargo Chairman Richard Kovacevich told Mr. Steel that Wells Fargo was willing to enter into a deal without any government assistance. "A merger could be executed before the market opened Monday," Mr. Steel said he was told.

At 6 p.m. the next day, Mr. Kovacevich backed out, saying Wells Fargo couldn't follow through under the "compressed timetable to acquire Wachovia without substantial government assistance," according to the affidavit. An affidavit is a written declaration made under oath as a truthful representation of facts.

FDIC Chairman Sheila Bair then contacted Mr. Steel, advising him to "commence negotiations with Citi," since the government felt that government-assistance would be likely in any deal.

On Monday, Sept. 29 at 6:30 a.m., Mr. Steel told Wachovia's board of directors that there were two options. Either the holding company, called Wachovia Corp., could file for bankruptcy, with its banking subsidiaries going into receivership, or parts of the company could be sold to Citigroup.

Wachovia directors agreed to take Citigroup's offer, valued at about $2 billion.

In the affidavit, Mr. Steel said that subsequent negotiations with Citigroup "proved extremely complicated and difficult," though he didn't go into more detail in the affidavit.

"Wachovia was under tremendous pressure from Citi and the regulators to conclude a transaction with Citigroup with definitive agreements by the following Monday, October 6, 2008."

On Thursday, Oct. 2, Mr. Bair contacted Mr. Steel and asked if he had talked to Mr. Kovacevich recently. Mr. Steel said he hadn't, according to the affidavit. Ms. Bair said Wells Fargo would be making a counteroffer, adding that Mr. Steel should give it "serious consideration."

Mr. Steel was on a plane about to take off, so Ms. Bair called Wachovia's general counsel and went over some of the details, the affidavit states. Mr. Kovacevich called Mr. Steel at 9 p.m., once the flight had landed. Four minutes later, Mr. Kovacevich sent a signed merger agreement from Wells Fargo. Wachovia's board had a conference call at 11 p.m. that night.

"The Company's advisors and I told the board that we believed that unless a definitive merger agreement was signed with either Citigroup or Wells Fargo by the end of the day Friday, October 3, that the FDIC was prepared to place Wachovia's banking subsidiaries into receivership," Mr. Steel said in the affidavit.

Ex-CEO of S&L bought by Wachovia defends record

Once hailed for running their savings-and-loan company like an endearing mom-and-pop shop, Herb and Marion Sandler are now being vilified as ruthless home lenders who helped destroy Wachovia Corp. and contributed to the financial decay that led to the U.S. government's $700 billion rescue plan to buy rotten mortgages.

After deflecting the media for months, Herb Sandler defended his lending record in an interview Sunday. He also tried to make a case for why Wachovia is worth substantially more than the $14.8 billion that Wells Fargo & Co. has offered for the company.

Sandler, 77, spoke to The Associated Press in the San Francisco office of his family's charitable foundation the morning after NBC's "Saturday Night Live" broadcast a skit deriding the Sandlers as predatory lenders who had duped unsophisticated borrowers and Wachovia, too. A caption shown during the sketch skewered the Sandlers as "people who should be shot."

Although the timing of the interview was coincidental, Sandler was seething after watching a replay of the skit on the Internet.

"I have been listening to this crap for two years," Sandler said. "We are being unfairly tarred. People have been telling us to speak out for some time, but we didn't think it was appropriate. That was clearly a mistake."

The public ridicule represents a 180-degree turn for the Sandlers, who were considered to be the voices of reason while they steered Golden West Financial Corp. and its subsidiary, World Savings, through a period of financial recklessness that led to the failure of thousands of other S&Ls in the 1980s and 1990s.

Golden West never strayed from its staid lending approach while the Sandlers scolded others for their risky investments in commercial real estate and exotic business ventures.

Herb Sandler agrees with his critics on one point: He and Marion, who were Golden West's co-chief executives for more than 40 years, couldn't have picked a better time to sell the company than when they closed their $24.3 billion deal with Wachovia in October 2006.

After years of double-digit increase, home prices began to crumble once Wachovia took over, and now the Charlotte, N.C.-based bank is in such deep trouble that it has agreed to be sold to Wells Fargo for just $7 per share — nearly 90 percent below the company's stock price at the time of the Golden West takeover.

Citigroup Inc. is fighting in court to enforce an earlier agreement that would allow it to buy Wachovia's banking operations for $2.1 billion, or $1 per share.

The Sandlers were the biggest winners in the Golden West sale, collecting Wachovia stock that was worth more than $2 billion when the deal closed. More than $1 billion of the stock was used to fund the couple's charitable foundation. Herb declined to say how much of the stock the couple still owns, saying only they still have enough shares to care what happens to Wachovia.

Sandler maintains that Wachovia's mortgage problems aren't as severe as they might seem, especially now that the federal government is prepared to take some of the deteriorating mortgages off lenders' books.

Once the clean-up work is complete, Sandler believes Wachovia will be worth $60 billion to $100 billion. Although he thinks Wells should have been pressured to pay more, Sandler says it's preferable to the Citigroup bid, which was negotiated with the help of federal regulators. He doubts Wells or any other bidder will up the ante for Wachovia because of the turmoil in financial markets.

More than anything else, Sandler wants to burnish his and his wife's legacy.

Taking advantage of regulations passed in 1981, World Savings had thrived for decades by specializing in adjustable rate mortgages that gave borrowers the option of deferring the interest due on their monthly payments. These so-called option-ARMs have been widely derided for driving up the amount that borrowers owed on their loans, ultimately saddling them with payments that they can't afford.

But Sandler contends the troubles cropping up in World's option-ARM, or "pick-a-pay," portfolio haven't been severe enough to drag down Wachovia. The bank has charged off about $850 million of the $122 billion pick-a-pay portfolio so far, but the bank's management has indicated the losses could rise to $12 billion.

If Wells Fargo prevails in its effort to buy Wachovia, it intends to take a $32 billion hit on the pick-a-pay portfolio — an action that implies the loans, on average, are only worth 74 cents on the dollar.

Sandler contends the loss projections are grossly exaggerated and rely on improbable Depression-era assumptions about the U.S. economy. He doubts the losses on World's former mortgage portfolio will rise above $10 billion, largely because none of the loans were made to borrowers with shoddy, or "subprime," credit records.

Sandler said World's pick-a-pay loans were made under the same qualifying standards that had been in effect during the previous 25 years when the savings and loan's losses were among the lowest in the industry and the Sandlers were consistently praised for their prudence.

"We had a great track record for 40 years," Sandler said. "If this product was so dangerous, how could that be? There is something anomalous about that, isn't there?"

(This version CORRECTS ADDS dropped word "have" to 11th graf, corrects 2nd, 13th and 14th grafs to reflect Sandler isn't seeking higher Wells Fargo bid even though he believes Wachovia is substantially more. Moving on general news and financial services.)

Citigroup wins first round for Wachovia

Citigroup has won the first round in a bitter match with Wells Fargo over the takeover of Wachovia after a New York court gave it more time for exclusive negotiations with the sixthlargest US bank.

Citi is also suing Wachovia for up to $60bn in damages, accusing it of breaking an exclusivity agreement when it clinched a rival deal with Wells, according to people close to its case.

However, Justice Charles Ramos of the Supreme Court of the state of New York did not rule on that claim when he granted Citi an emergency extension of the exclusivity agreement on Saturday night.

Yesterday it emerged that hours before Wells trumped its bid for Wachovia on Thursday, Citi had sweetened its offer for the Charlotte-based lender. A deal was close to being signed between Citi and Wachovia but it was scuppered by Wells Fargo's intervention.

People close to the situation said that Citi's increased offer, the details of which are not known, remained on the table.

Citi claimed that prolonging the exclusivity agreement until at least Friday, when both sides are due to appear in court, has frozen merger talks between Wachovia and Wells Fargo.

The San Francisco-based lender trumped Citi's government-aided $2.2bn bid for the banking operations of Wachovia with a $15.1bn all-share offer.

Citi said that the exclusivity agreement, which would have expired on Monday, "unconditionally bars Wachovia from negotiating or entering into a merger/acquisition agreement with any party other than Citi".

People close to Wachovia said the extension of the agreement simply meant it would keep talking to Citi but added that its management still favoured a deal with Wells.

Citi, Wachovia Claim Gains From Sunday Court Hearing

Citigroup Inc. (C) and Wachovia Corp. (WB) both claimed victory Sunday following a hearing in a federal court in New York related to the two companies' souring deal agreement.

Previously, Citigroup had scored a win Saturday night, when the Supreme Court of the State of New York granted the banking giant's motion to temporarily prevent Wachovia from negotiating a merger with anybody but Citi. Citigroup had agreed in principle to buy Wachovia's banking operations Monday, Sept. 29.

Wachovia rushed to the United States District Court for the Southern District of New York on Sunday to obtain a restraining order preventing Citi from interfering with Wachovia's deal to sell the entire company to Wells Fargo & Co. (WFC), which was announced Friday. That deal collided with an agreement in principle Wachovia had struck with Citi on Monday, where Citi would buy Wachovia's banking operations.

The hearing was oral, and no written decision was available, but both sides claimed gains from Sunday's hearing. Judge John George Koeltl was not immediately available for comment.

A spokeswoman for Wachovia said, "We are pleased that Judge Koeltl granted our motion for expedited resolution of the exclusivity agreement between Wachovia and Citigroup."

Citi had not objected to an expedited proceeding, but a spokeswoman said: "We are very pleased that Wachovia's motions for emergency injunctive relief and a temporary restraining order were denied today in Federal Court."

Citi rattled as rival steals its thunder

When he received an early morning phone call telling him that Wells Fargo had just trumped Citigroup's government-brokered $2.2bn deal to buy Wachovia, a senior Citi executive thought he was having a bad dream. But as he awoke fully, reality dawned on him: his company had been blindsided by a blitz from Wells for Wachovia - a bank that Citi thought it had in the bag 48 hours earlier.

Wells, which abandoned talks to acquire Wachovia last week, made its surprise move at 9pm on Thursday night when Dick Kovacevich, its chairman, called Robert Steel, Wachovia's chief executive, with details of the $15.1bn all-share bid, according to people close to the situation.

Some insiders say that Wells had contacted regulators earlier and regulators had told Wachovia it might receive an unsolicited offer.

Mr Steel hastily convened a board meeting by phone and after hours of discussions, Wachovia, the sixth-largest lender in the US, was ready to switch horses.

The news sparked an angry reaction from Citi, whose executives had been with Wachovia's top brass, including Mr Steel, on Thursday to thrash out details of their own merger.

The US financial services group said Wachovia's decision to swap partners was in breach of an exclusivity agreement.

Citi is still considering whether to raise its $1-a-share bid for Wachovia, according to people close to the situation, but it has also issued a thinly veiled threat to take legal action to stop the transaction or demand damages.

The exclusivity agreement, seen by the Financial Times, states that Wachovia "shall not . . . solicit, initiate or take action to facilitate or encourage the submission of any acquisition proposal [or] enter into or participate in any discussions or negotiations".

The document, which was signed by Gary Crittenden, Citi's chief financial officer, and Jane Sherburne, Wachovia's general counsel, was due to expire on Monday, according to a handwritten note initialled by Ms Sherburne.

Wachovia declined to comment on the exclusivity agreement and John Stumpf, Wells Fargo's chief executive, told Wall Street analysts that he was not aware "of any merger agreements that have been consummated".

Mr Stumpf, who was advised by JPMorgan Chase and the renowned law firm of Wachtell, Lipton, Rosen & Katz, said he was confident the deal for Wachovia, which has been advised by Goldman Sachs and Sullivan & Cromwell, had been "done appropriately."

But if Citi follows through with its threat to take legal action, that decision could be out of Mr Stumpf's hands.

Citi insiders yesterday pointed to the Texaco/Pennzoil case as supporting their argument.

In 1984, Texaco trumped a $2.6bn deal by Pennzoil to buy a stake in Getty Oil with its $10.1bn proposal to buy the whole company. Texaco claimed Pennzoil and Getty had only had an agreement in principle, not a legally enforceable contract. Pennzoil sued, and won $10.53bn, claiming the loss of a "significant and valuable business opportunity."

However, Wachovia's advisers argued that its management was duty bound to present Wells' offer to the board. The board, for its part, felt it could not justify rejecting a higher bid to its shareholders, partly because the agreement with Citi had come under pressure from regulators.

American banks in Wachovia face-off

Citigroup said it had been granted “emergency injunctive relief” from the Supreme Court of the State of New York to extend the exclusivity agreement governing its $2.1bn takeover bid.

Wachovia and Wells Fargo denied the court order had any effect on their agreement, which Wells called “firm” and “binding”.

The fight comes after the bank’s board agreed to a takeover by Wells Fargo on Thursday, three days after Citigroup appeared to have agreed its own government-assisted deal with the company.

Citigroup moved to block the merger, claiming it had “legal rights” and had been giving Wachovia liquidity support throughout the week.Wachovia had committed not to negotiate with other parties until tomorrow at the earliest.

Citigroup reportedly offered to significantly increase its bid, but that was rejected, according to the Wall Street Journal.

The legal battle comes at what some commentators suggest is the worst possible time for the US government.

While its $700bn bank bail-out was pushed through Congress on Friday, it is still relying on America’s biggest remaining banks, including Citigroup and Wells Fargo, to support its plans and provide liquidity.

On attaining the court ruling, which Wachovia had tried to block, Citigroup said it would “continue negotiations with Wachovia on the previously agreed-to transaction”.

Wachovia and Citigroup have been ordered to appear before the New York court on Friday.

Citigroup, Wells May Carve Up Wachovia in Compromise, WSJ Says

Citigroup Inc. and Wells Fargo & Co., prodded by U.S. regulators, may divide up Wachovia Corp. to end a takeover battle that's disrupting a federal rescue of the ailing North Carolina bank, the Wall Street Journal reported.

Officials from the Federal Reserve and Treasury are involved in the talks while executives of Charlotte, North Carolina-based Wachovia have been excluded, the Journal reported, citing people familiar with the situation. Citigroup would get Wachovia's branches in the northeast and mid-Atlantic regions and Wells Fargo may take the Southeast and California, the newspaper reported. The asset-management and brokerage units would go to Wells Fargo.

Citigroup, the biggest U.S. bank by assets, is bidding for Wachovia while trying to rebuild after $61 billion of losses tied to the collapse of mortgage markets. The bank wants to buy parts of Wachovia for about $2.16 billion, while Wells Fargo is bidding about $15 billion for the whole company. Wachovia said Wells Fargo's bid is better for investors, workers and taxpayers because, unlike Citigroup, it doesn't rely on government aid.

Under the split being discussed now, neither New York-based Citigroup nor San Francisco-based Wells Fargo would get U.S. financial assistance, the Journal said.

The two suitors have spent the weekend wrangling in state and federal court over Wachovia, with Citigroup winning a New York state ruling on Oct. 4 that said it had the exclusive right to negotiate a takeover until Oct. 10. That ruling was overturned on appeal today, leaving the original expiration date of Oct. 6 in place.

``We are pleased that the unfounded order entered yesterday has been vacated,'' said a Wells Fargo statement. ``Wells Fargo will continue working toward the completion of its firm, binding merger agreement with Wachovia.''

Competing Offers

The takeover battle began Sept. 29 when Citigroup made its bid with backing from the Federal Deposit Insurance Corp. to rescue Wachovia from declaring bankruptcy, according to documents provided by Citigroup. Wells Fargo, which said it was unable to complete a competing bid in time to be considered, returned with its higher offer later in the week, which Wachovia accepted.

Citigroup said this violated a signed agreement not to solicit new offers. New York State Supreme Court Justice Charles Ramos sided with Citigroup, and he extended the exclusive right to negotiate from the Oct. 6 expiration to Oct. 10 when he scheduled a hearing on the merits.

Wachovia said yesterday in a complaint filed in the U.S. district court in New York that FDIC Chairwoman Sheila Bair, who initially agreed to provide financial support to the Citigroup bid, later helped broker the deal with Wells Fargo.

`Serious Attention'

On Oct. 2 at about 7 p.m., Bair called Wachovia CEO Robert Steel and told him to expect a call from Wells Fargo Chairman Richard Kovacevich regarding the bank's offer of $7 a share, according to the complaint. Bair encouraged Steel ``to give serious consideration to that offer,'' according to the Wachovia court filing.

``Officials from both the Treasury Department and the Federal Reserve also contacted Wachovia's lead outside counsel to inform him that the offer from Wells Fargo was forthcoming and that Wachovia should give it serious attention,'' according to the complaint.

Andrew Gray, a spokesman for the FDIC, didn't return a message left on his mobile phone seeking comment.

`Simpler, Easier'

Steel said in a separate affidavit that he agreed to the Wells Fargo deal partly because the FDIC was threatening to put its banking operations into receivership if a ``definitive merger agreement'' with either Citigroup or Wells Fargo wasn't signed by Oct. 3.

Wachovia's discussions with Citigroup had ``proved extremely complicated and difficult,'' whereas Wells Fargo's offer was ``simpler, easier for shareholders to understand, more likely to close and more likely to receive shareholder approval,'' Steel said.

After Wachovia's board approved Kovacevich's offer, Bair and Steel together phoned Citigroup CEO Vikram Pandit to say that Wachovia had agreed to the Wells Fargo deal, Steel said.

Separately, U.S. District Judge John Koeltl put off ruling on whether Wells Fargo may proceed with its takeover bid. A hearing was set for Oct. 7, at which another federal judge will be asked to decide the case.

Federal Case

Wachovia took the case to federal court, and at the emergency hearing yesterday, David Boies, a lawyer for Wachovia, asked Koeltl to decide whether language in the $700 billion federal bailout law for the banking industry enacted last week permits Wells Fargo to make a new bid.

Koeltl said it ``appears'' Wells Fargo is correct, adding that a judge who is to be permanently assigned to the case this week may reach a different conclusion.

Wachovia spokeswoman Christy Phillips-Brown said the bank was ``pleased'' that the judge granted its request for a quick resolution, while Citigroup's Shannon Bell said the company was ``very pleased that Wachovia's motions for emergency injunctive relief and a temporary restraining order were denied.''

Citigroup dropped $4.15 to $18.35 on Friday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.

Steel's Stake

Wachovia CEO Steel, 57, stands to benefit from any improvement in bids for Wachovia. Recruited from the Treasury department in July to rebuild the lender's credibility with investors, he bought 1 million shares of Wachovia stock for about $16 million two weeks after arriving at the company.

Wells Fargo's bid won endorsement from stakeholders including Davis Selected Advisers LP, the Dodge & Cox mutual fund group and the Sandler family, according to a statement.

The Sandlers sold Golden West Financial Corp. to Wachovia in 2006 for about $24 billion, when Wachovia was run by CEO Kennedy Thompson. The unit's option-ARM home loans have since been blamed for contributing to Wachovia's record quarterly losses and Thompson lost his job.