One has to wonder whether the FDIC’s giving a wink and a nod to Wells Fargo’s attempt to snatch Wachovia away from Citi will prove to have been too clever by half. The apparent motivation was the lower explicit cost to the taxpayer of the Wells deal (note Wells was going to take large tax writeoffs, which reduce, indeed may eliminate the cost differential, but that point seems lost on the mainstream media), but it may also have been to keep pressure high to wrap up a deal before anyone could take too hard a look at at the supposed prize. Wachovia is looking less desirable than it once did, now that both sides have dug deeper as a result of the negotiation process, further complicating achieving a quick resolution.
This is increasingly looking like the FDIC will wind up with egg on its face. They do not want Wachovia hanging in the breeze, and a retraded deal may leave the FDIC back at square one in terms of its support for a transaction, or in a worst-case scenario, they may wind up taking control of the bank. From the Wall Street Journal:
The discussions, which began Sunday, have been snagged over the intricacies of carving up the Charlotte, N.C., bank, ranging from deposits to loans to securities. After burrowing deeper into Wachovia’s books, Citigroup and Wells Fargo have been surprised by the concentration of assets they regard as low-quality, these people said.As a result, both banks are worried that buying even part of Wachovia could saddle them with steeper losses than previously expected.
The two would-be buyers also have been sparring over the computer system used in Wachovia’s 3,348 retail branches, one person familiar with the discussions said Wednesday. Citigroup, known for its hodgepodge of technology that hasn’t been fully integrated, wants full control of Wachovia’s system when the deal closes. Wells Fargo has countered that the two banks should share it temporarily.
Also adding jitters to the Wachovia talks were Bank of America Corp.’s struggles on Tuesday to sell $10 billion in stock. Citigroup and Wells Fargo have said they plan to sell stock as part of their competing takeover offers for Wachovia, but that could be more difficult than they previously thought.
People close to the discussions said they remain hopeful that a deal can be reached. But the slow progress risks creating more turmoil for Wachovia, which was in danger of being seized by federal regulators less than a week ago,
Elvis 
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Yves: good writeup.
There’s one other aspect of this story worth pointing out: Citi and Wachovia are discovering things that the bank examiners should have turned up. (And compare how FDIC’s loss estimate on IndyMac doubled in the weeks after it failed.) I suspect that Paulson’s (OCC’s and OTS’s) “see no evil” examination policies explain why FDIC has been singularly unable to pass assets to acquiring banks lately — neither FDIC nor the acquirer knows what they are really worth. Interesting unintended consequence of this Administration’s fictional approach to asset valuations.