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.
