Fed Wants Citi and Wells to Kiss and Make Up Over Wachovia (Updated)

The Fed is pressuring Citi and Wells Fargo to settle their dispute over Wachovia. The assumption that there is a way to divvy the carcass that will leave each side feeling they got more than half a loaf. But the push is on to reach an agreement in principle before the US markets open, and with many issues to be resolved (and a lack of good will between the two banks), it will be a struggle to wrap this up in time.

Note that neither bank has abandoned its push on the litigation front.

Update: Reader Tom Lindmark correctly pointed out in comments that since Wells reached a private deal with Wachovia, why do the powers that be think they can intercede?

From the Wall Street Journal:

Under pressure from the federal government, Citigroup Inc. and Wells Fargo & Co. were locked in negotiations Sunday night aimed at trying to defuse the battle for Wachovia Corp., according to people familiar with the situation.

In a sign that U.S. officials are concerned about the increasingly volatile situation, officials from the Federal Reserve were pushing hard for Citigroup and Wells Fargo to reach a compromise. That effort could result in essentially carving up the Charlotte, N.C., bank between its two suitors, these people 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 take over Wachovia’s asset-management and brokerage units.

Unlike Citigroup’s original agreement to take over Wachovia, 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 a person briefed on the talks.

Even as negotiations to split up Wachovia were proceeding, lawyers for Wachovia and Citigroup were sparring in federal and state court in New York on Sunday afternoon. Wachovia asked a U.S. district court judge to overturn a Saturday night ruling by a state-court judge that prods Wachovia to go back to the negotiating table with Citigroup. Citigroup contends Wachovia reneged on a binding $2.1 billion deal for Wachovia’s banking business. Meanwhile, a state appeals court on Sunday night reversed the state court’s order from the night before….

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.

Update 3:30 AM: As predicted, there will be no deal before the market opening tomorrow. From an updated version of the Wall Street Journal story:

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

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  1. Anonymous

    Given that Wells Fargo hired Wachtell, which is one of the top couple law firms for hostile M&A, it seems pretty unlikely Wells Fargo has a settlement attitude.

    It is weird that Citi and Wachovia hired litigation boutiques (Gregory P Joseph Law Offices and Boise Schiller). Neither of these firms are big names in M&A, hostile or otherwise.

  2. Yves Smith

    I don't know the firm Citi hired. It may be that it has expertise in bank regulatory matters, although you are right, the issue under dispute reads as an M&A issue.

    Surprising that no one has signed up one of the banking heavies, like Rodgin Cohen at Sullivan & Cromwell. It was predictable that the authorities would be very unhappy about this gambit and would try to force resolution.

  3. Steve

    The Fed injecting itself into this dispute will be viewed as far more unsettling than Wachovia’s problems, which no is worried about anymore anyway. The dispute is like a touching effort of capitalism to rise from its sick bed.

  4. doc holiday

    Good crap here:

    Did Citi Really Win?

    Meanwhile, the case is caught up in a procedural tangle as Citi tries to keep it in New York State Court and Wells Fargo and Wachovia try to remove it to federal court. Citi has sued Wells Fargo, Wachovia and all of their directors. The addition of the directors appears to be an attempt by Citi to prevent Wells and Wachovia from removing the case to federal court on the basis of diversity jurisdiction.

  5. Anonymous

    "I don't know the firm Citi hired. It may be that it has expertise in bank regulatory matters, although you are right, the issue under dispute reads as an M&A issue. Surprising that no one has signed up one of the banking heavies, like Rodgin Cohen at Sullivan & Cromwell."

    Joseph Gregory is a pure lit shop, not M&A or regulatory. They don't have the bodies or expertise to do a massive M&A deal.

    Rodgin Cohen at Sullivan may be the banking lawyer with the biggest name. However, Wachtell, Sullivan Cromwell, Simpson Thacher, Cleary Gottlieb, Davis Polk, and Skadden are all heavyweights in banking M&A.

  6. Anonymous

    With the winter round the corner… it must be getting really freaking cold at the Fed with so many goddamn windows open.

  7. ubetchaiam

    “But this is again who are the clear “winners” JP morgan, bank of america, golden s, and citi.” —so true; just read section 101(e) of the legislation.
    Talk about manipulation of markets; no, let’s not, it’s too depressing.

  8. Tom Lindmark

    Wait a minute. I know these are unusual times but can’t we at least give a hat tip to the rule of law. The last time I checked, Wachovia was still an independent enterprise. Not in receivership or conservatorship. As such, don’t they have the right to decide their future as well as certain fiduciary obligations to their owners?

    Wells came up with a private sector response to the problem and the public sector is whining. Come on.

  9. russell1200

    I find it very flattering that so many people are fighting over my checking account.

    I just wish it had a balance even remotely large enough to worry about the insurance limits.

  10. fusion

    Rodg Cohen is representing Wachovia.

    The regulators think they can get involved because they have the power to approve any deal and to regulate each bank in the meanwhile

  11. Jonathan Bernstein

    Agree, Fusion.
    And the reason why they want to get involved in my opinion is this. BAC, C, and JPM have done the lion’s share of the supervised acquisitions. Back in the day, usually strong institutions were the ones who took over weak ones. None of these three are particularly strong. So… the TARP is there to exchange these banks’ toxic waste for pristine Treasurys. Not only that:

    The Citi/ WB was extremely sweet for Citi. It was almost a bailout of C right there. If WFC snatches the prize (which might not be that much of a prize at all on these terms unless the tax advantages are really good, as Yves said) then the regulators will need to do something else to shore up Citi… or spend alot of the TARP on it.

  12. inside mole

    Fresh off the presses from Wells:
    Wachovia, Citigroup and Wells Fargo, in consultation with the Federal Reserve, announce the
    following agreement.
    Wachovia, Citigroup, and Wells Fargo have agreed to:
    1. A standstill of all formal litigation activity effective immediately;
    2. Cease any formal discovery activities, and
    3. Cooperate in good faith to agree among themselves to secure orders where necessary in all
    applicable cases in all jurisdictions tolling any schedules for the filing of litigation papers
    or court appearances or any other formal litigation deadlines, with the goal of preserving
    the status quo during the litigation standstill period.
    This standstill agreement will terminate at noon on Wednesday, October 8, 2008, unless otherwise

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