Citi ends talks with Wells Fargo on Wachovia

By Jui Chakravorty Das

NEW YORK (Reuters) - Citigroup (C.N) abandoned its brief but acrimonious battle with Wells Fargo & Co (WFC.N) over Wachovia Corp WB.N, 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 on Thursday 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. [nWEN9006]

Citi's sudden retreat came on a day the broader market fell 7 percent 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 percent, Morgan Stanley (MS.N) tumbling 26 percent and Citi declining 10 percent. In extended trading after Citi announced that it was pulling out, its shares rose 15 percent 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 U.S. 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 MER.N agreed to be bought by Bank of America Corp (BAC.N), Washington Mutual Inc (WAMUQ.PK) was seized by regulators and taken over by JPMorgan Chase & Co Inc (JPM.N) and Lehman Brothers Holdings Inc LEH.N (LEHMQ.PK) 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, Oct. 10, at 8 a.m. (1200 GMT).

RISKS, DAMAGES

But late on Thursday 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.

Wachovia had been unable to quantify potential losses from that suit, the source said.

Wachovia said it was "pleased" that Citi ended efforts to stop it from merging with Wells Fargo. Wells Fargo did not immediately provide comment. [nN09327357]

Sheila Bair, chairman of the Federal Deposit Insurance Corp, praised Citi's decision in a statement, saying it brought "needed certainty" to the situation. [nN09330038]

The U.S. Federal Reserve said it would "immediately" begin considering the Well Fargo bid. [nNAT004455]

Citi reiterated that it believes it has strong legal claims against Wachovia and Wells Fargo for breach of contract and tortious interference with contract. Earlier this week, the bank said it was seeking up to $60 billion in damages from San Francisco-based Wells Fargo.

On Thursday, Citi said it planned to pursue the claims "vigorously" even while abandoning earlier efforts at a court order blocking the Wells takeover.

Wells Fargo has managed to remain profitable during the credit crisis, while Citi is looking to turn around its business after posting about $60 billion in write-downs and losses during the year.

Citi did say it remained willing to complete its original deal, but some industry experts believe that is unlikely.

"That looks as if it probably won't happen," said Michael Holland, founder of Holland & Co, which oversees more than $4 billion. "At the end, my best bet is that Well's deal is the best economic and political deal and something gets done there."

OTHER BANKS

One major exception to the sell-off in stocks was National City Corp NCC.N, which rose more than 15 percent as a media report said the bank holding company may be in talks to be acquired.

Cleveland-based National City is viewed as one of the weaker regional banks, hard-hit by the credit crisis and, unlike fellow strugglers Washington Mutual Inc (WAMUQ.PK) or Wachovia, it has not yet found a buyer.

The bank has major presences in Ohio, Michigan and Florida, areas that have been devastated by the collapse of the U.S. housing market. The bank's shares have fallen more than 80 percent this year.

(Additional reporting by Paritosh Bansal, Megan Davies and Grant McCool, Elinor Comlay, Phil Wahba)