Wells Fargo grabs troubled Wachovia from Citigroup

Wachovia takeover:THE UPHEAVAL in US business descended into acrimony yesterday when San Francisco-based bank Wells Fargo snatched troubled lender Wachovia from the arms of Citigroup, which immediately called on Wachovia to follow through with the rescue deal it agreed with Citi four days previously.

The Wells Fargo agreement marks an abrupt about-turn for Wachovia, the sixth largest US financial institution by assets, which agreed to sell most of its operations to Citigroup last Monday in a government-assisted deal that saved it from the brink of collapse. However, the Wells Fargo proposal places a considerably higher worth on the bank in an all-share proposal that values Wachovia at $15.1 billion, keeps its business intact and is not conditional on any financial support from the federal authorities.

Such terms, agreed on Thursday night, trump those offered by Citi, which agreed to buy only Wachovia's branch network in an all-stock deal valued at $2.16 billion. In that deal the Federal Deposit Insurance Corporation (FDIC) was to take on any losses in Wachovia's loan book in excess of the $42 billion that Citi promised to absorb.

Amid considerable controversy in the US over the Bush administration's plan to bail out the financial sector to the tune of $700 billion, Wells Fargo and Wachovia stressed yesterday that their agreement did not require any "financial assistance" from the FDIC or any other government agency.

Wachovia's decision to spurn Citi so soon after their agreement stands as a dramatic development in a sweeping series of transactions that have transformed the landscape of the US financial sector in a matter of weeks.

Stronger players - chief among them JPMorgan and Bank of America - have moved swiftly to consolidate their position by rescuing lenders brought to heel by the credit crisis.

Wachovia's weakness derives from its control of a $122 billion portfolio of "option" adjustable-rate mortgages which exposes it to the collapse of the US housing market. Only a couple of weeks ago the bank had been involved in inconclusive merger talks with Morgan Stanley.

The talks with Morgan Stanley had petered out before last week's government seizure of Washington Mutual - and its fire sale to JPMorgan - precipitated a dramatic slide in Wachovia's share price that brought it close to collapse last Friday.

In rescue talks brokered last weekend by the FDIC, in the interests of "confidence in the banking industry given current financial market conditions", Wells Fargo had been an unsuccessful bidder for Wachovia.

Citi angrily called for the cancellation of the Wells Fargo agreement, which trumps a deal that would have pushed Citi into third place among US banks.

If its deal with Wachovia goes ahead, Wells Fargo will now join the upper tier of US banking. Alongside Bank of America and JPMorgan Chase, Wells Fargo would be part of a trio that control some 30 per cent of all US bank deposits.

The enlarged Wells Fargo would have $1.42 trillion in assets, $787 billion in deposits and 10,761 branches in 39 states.

While the Wells Fargo deal puts regulators who stitched together the Citi deal in a tricky position, share price movements yesterday suggest the market believes the Wells Fargo deal will proceed.

Citi's stock lost 15 per cent of its value in morning trading, wiping out a 12 per gain since the Wachovia deal was made public.

Wachovia shares rose 77 per cent early yesterday, and Wells Fargo shares rose 9.6 per cent .

In a statement, Citi said it had been negotiating in good faith with Wachovia and "nearly completed the definitive agreements" required to execute the deal.

"Citi has demanded that Wachovia and Wells Fargo terminate and not proceed with any proposed transaction, any conduct in furtherance thereof, or any other act in violation of the exclusivity agreement. Citi has substantial legal rights regarding Wachovia and this transaction."

FDIC chairman Sheila Bair said yesterday that it "stands behind" the deal with Citi.

However, she said the organisation would be "reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest".