Regulators say public interest key in Wachovia bids

Men walk past a branch of Wachovia Bank in Washington, October 3, 2008.

WASHINGTON (Reuters) - U.S. banking regulators said on Friday they would put the public interest first in resolving rival proposals for Wachovia Corp from Wells Fargo and Citigroup Inc.

"The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability," the Federal Reserve and the Office of the Comptroller of the Currency said in a joint statement.

The Federal Deposit Insurance Corp said it stood by the Citi deal, which regulators helped broker earlier in the week, but left open the possibility of accepting Wells Fargo's bid. The Wells Fargo plan would not present a potential risk to U.S. taxpayers that the Citi deal would.

"The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest," FDIC Chairman Sheila Bair said.

Regulators were caught off guard on Friday when Wells Fargo said it planned to buy all of Wachovia for more than $16 billion. The announcement came just four days after the FDIC announced a shotgun deal brokered by the Fed and Treasury Department in which Citi agreed to buy Wachovia's banking operations.

The Citi deal would require the FDIC to absorb up to $42 billion in losses, should Wachovia's $312 billion pool of loans later turn sour. It also allowed the FDIC to receive $12 billion in preferred stock and warrants from Citi for taking on possible future risks.

Wells Fargo's deal, if consummated, would not carry the potential risks for taxpayers that a government-approved Citi deal would include.

Citi responded by demanding that Wells Fargo drop its bid and accused Wachovia of breaching an agreement to negotiate with Citi exclusively.

The FDIC's Bair assured banking customers their deposits would be safe regardless of which bank ended up with Wachovia. "It should be emphasized that both the Citigroup proposal as well as the new Wells proposal would stand behind all creditors including depositors, insured and uninsured," she said.

Neither Bair nor her agency participated in the negotiations between Wells Fargo and Wachovia, according to a source familiar with the matter.

An FDIC spokesman declined to comment.

WELLS FARGO OFFER NOT YET REVIEWED

The Fed and the Office of the Comptroller of the Currency said they had not yet reviewed the new Wells Fargo proposal, but had extensively examined Citi's bid.

"We have not yet reviewed the new Wells Fargo proposal and the issues that it raises," the Fed and OCC said.

The central bank regulates bank holding companies, and the comptroller is the primary regulator for the banking units of Wachovia, Citi and Wells Fargo.

The FDIC, which insures bank deposits, has tried to match potentially failing banks with buyers in an effort to stave off harm to the deposit insurance fund, which stood at about $45 billion three months ago.

So far this year 13 banks have failed, including Washington Mutual Inc and IndyMac Bancorp Inc. More failures are expected over the next several months.

Banks received a lift this week when securities regulators gave them a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures. Banks complained that fair-value accounting rules, also called mark-to-market, posed obstacles for consolidation of banks that are in need of rescuers.

Also Friday, President George W. Bush signed into law a $700 billion bailout package for the U.S. financial industry. It will let the Treasury Department buy soured mortgage-backed securities that are choking world capital markets.

(Additional reporting by Dan Wilchins in New York; editing by Gerald E. McCormick, Jeffrey Benkoe and Bernard Orr)