- The Washington Times - Saturday, October 4, 2008

NEW YORK | A battle broke out Friday for control of Wachovia, as Wells Fargo agreed to pay $15.1 billion for the struggling bank, while Citigroup and federal regulators insisted that Citi’s earlier and lower takeover offer go forward.

The surprise announcement that Wachovia Corp. agreed to be acquired by San Francisco-based Wells Fargo & Co. in the all-stock deal - without government assistance - upended what had appeared to be a carefully examined arrangement and caught regulators off guard.

Only four days earlier, Citigroup Inc. agreed to pay $2.1 billion for Wachovia’s banking operations in a deal that would have the help of the Federal Deposit Insurance Corp.

The head of the FDIC said the agency is standing behind the Citigroup agreement, but that it is reviewing all proposals and will work with the banks’ regulators “to pursue a resolution that serves the public interest.”

Citigroup, which demanded that Wachovia call off its deal with Wells Fargo, said its agreement with Wachovia provides that the bank will not enter into any transaction with any party other than Citi or negotiate with anyone else.



Barring legal action, the future of Wachovia will be determined by the bank’s shareholders and regulators, which both have to approve a final deal.

It was clear which they preferred Friday, as Wachovia shares climbed nearly 60 percent.

Wachovia shares rose $2.30, or 58 percent, to $5.21, while Wells Fargo fell 60 cents, or 1.7 percent, to $34.56. Citigroup fell $4.15, or 18 percent, to $18.35, making it by far the steepest decliner among the 30 stocks that make up the Dow industrials.

The FDIC is talking out of both sides of its mouth, said Roger Cominsky, partner in law firm Hiscock & Barclay’s financial institutions and lending practice. The agency says it stands behind the deal with Citigroup because it hasn’t been nixed yet, he said. “But, at the same time, they are saying they are reviewing all proposals.”

By law, he said the FDIC is required to find the least-costly resolution for taxpayers. The Wells Fargo deal would not rely on any assistance from the government.

The Federal Reserve, which has regulatory oversight of the three big banks, said it hasn’t had time to review the proposed sale of Wachovia to Wells Fargo but will work to ensure that all creditors and depositors of Wachovia are protected.

The Fed said regulators will be working with Wachovia and Wells Fargo “to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.”

Under Wells Fargo’s deal, Wachovia shareholders would receive 0.1991 shares of Wells Fargo for every share of Wachovia stock they own, valuing Wachovia at about $7 per share. This is a nearly 80 percent premium over the stock’s Thursday closing price of $3.91. Shares closed at $10 on Sept. 26, the last trading session before the deal with Citigroup was announced.

“This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support,” said Robert Steel, Wachovia’s president and chief executive officer.

In its planned takeover of Wachovia, Citigroup said it would assume $53 billion worth of debt and agreed to absorb up to $42 billion of losses from Wachovia’s $312 billion loan portfolio. The FDIC agreed to cover any remaining losses in exchange for $12 billion in Citigroup preferred stock and warrants.

“Wells’ deeper and more considered due diligence has probably revealed fewer risky assets and a larger number of higher valued assets than originally thought,” said Anant Sundaram, professor of finance at the Tuck School of Business at Dartmouth College in an e-mail to the Associated Press. “Although it is still too early to tell, this could presage a significant shift in market sentiment toward the value of companies such as Wachovia, and may suggest that there has been an overreaction in the downdraft that we saw in the past few weeks. It is a huge shot in the arm for market confidence. It is also a signal that market forces are capable of resolving some aspects of the crisis without undue congressional, and hence, taxpayer, intervention.”

The fight for Wachovia comes at a turbulent time for banks and financial firms as they grapple with the ongoing credit crisis, which led to the recent bankruptcy of Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc.

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