Citigroup abandoned its brief but acrimonious battle with Wells Fargo & Co over Wachovia, one of the United States' largest banks, losing out on a deal crucial to strengthening its retail banking business but vowing to pursue up to $60 billion in legal claims.
Citing dramatic differences in transaction structures and views of risks, Citi said last night that a deal was "impossible." But the bank said it remained willing to buy Wachovia under terms of its original deal.
Wells Fargo praised Citigroup's move and said it would aim to close the deal in the fourth quarter.
"We believe that is the correct and right decision for our country and our citizens and the health of our already stressed financial system, as well as our and Wachovia's respective shareholders and stakeholders," Wells Fargo Chairman Dick Kovacevich said in a statement.
Citi's sudden retreat came on a day the broader market fell 7 per cent as investors worried that moves by governments around the world to thaw frozen credit markets might not be enough to avert a global recession.
In particular, financial stocks were hit hard, with Wachovia falling 29 per cent, Morgan Stanley tumbling 26 per cent and Citi declining 10 per cent.
In extended trading after Citi announced that it was pulling out, its shares rose 15 per cent to $14.88 after closing at $12.93; Wachovia shares rose about 18 percent to $4.24 after closing at $3.60; and Wells Fargo shares rose 3 percent to $28.00 after closing at $27.25 on the New York Stock Exchange.
A Wells Fargo-Wachovia marriage would resolve the fate of another troubled US bank that was forced to put itself up for sale amid frozen credit markets and rising losses on mortgage-related assets.
As the financial crisis deepened in recent weeks, Merrill Lynch & Co Inc agreed to be bought by Bank of America Corp, Washington Mutual Inc was seized by regulators and taken over by JPMorgan Chase & Co Inc and Lehman Brothers Holdings Inc filed for Chapter 11 bankruptcy protection.
Wachovia is among many regional banks that found themselves at the fore of the credit crisis, holding large portfolios of toxic mortgages as the value of borrowers' homes dropped and they became unable to pay their loans.
Citigroup, Wells Fargo, and the Federal Reserve had spent days negotiating over the future of Wachovia and its valuable network of branches.
Citigroup agreed last week to buy Wachovia's banking assets for about $2.2 billion, with partial government assistance, and it financially supported Wachovia while they hammered out final details.
But days later, Wells Fargo signed an agreement to buy all of Wachovia for about $15 billion at the time, including its asset management and retail brokerage arms. The recent slide in Wells Fargo shares puts the value closer to $12 billion, based on Thursday's closing price.
Wells and Citigroup fought in court last weekend, but on Monday agreed to suspend litigation - a suspension that had been due to expire on Wednesday at noon (1600 GMT).
That deadline was extended in consultation with the Federal Reserve to Friday, October 10th, at 8am.
But late yesterday Citi said it had ended the talks with no agreement.
A source close to Citigroup said one of the sticking points was over how the two sides viewed the risks involved in taking over Wachovia's Golden West portfolio.
Wachovia has a $122 billion portfolio of option adjustable-rate mortgages that it largely inherited when it bought California lender Golden West Financial Corp in 2006.
The two sides could not agree on the degree of losses that portfolio could cause.
"I am not sure that there was agreement on how risky that portfolio was," the source said. "You have to be able to reach some mutually acceptable agreement on how the risks are going to be managed."
In addition, another source familiar with the situation said Citi had structured its initial deal to buy Wachovia's operations, but not the bank holding company, because of concern about a shareholder lawsuit related to the bank's ill-fated acquisition of California thrift Golden West.
Reuters