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NEW YORK Citigroup Inc and Wells Fargo & Co agreed to extend their legal standstill for two more days as they scrambled to come to a deal that could see them divvy up troubled regional lender Wachovia Corp.
Citigroup, Wells Fargo, and the Federal Reserve are negotiating over the future of Wachovia Corp, a bank hobbled by the credit crisis, but with a valuable network of branches.
Business news television network CNBC reported the U.S. government was pushing the two sides to reach an agreement by Wednesday night.
Citigroup preliminarily agreed at the beginning of last week to buy Wachovia's banking assets with partial government assistance and supported Wachovia last week while they hammered out final details.
But Wells Fargo on Friday said it had signed an agreement to buy all of Wachovia, including its asset management and retail brokerage arms.
Wells and Citigroup fought in court over the weekend, but on Monday agreed to suspend litigation -- a suspension that had been due to expire on Wednesday at noon.
In a statement, the banks said the deadline was extended in consultation with the Federal Reserve to Friday, October 10, at 8 a.m..
Sanford O'Neill analyst Kevin Fitzsimmons called the standstill agreement "an encouraging sign."
"It also could signal the commitment of the regulators to reach a resolution and prevent this situation from being dragged on in the courts," he wrote in a research note.
Citigroup shares fell 5 percent to close at $14.40 on Wednesday, bringing their decline over the past week to 37 percent. Wells Fargo, which is now the No. 2 U.S. bank by market value after JPMorgan Chase & Co, rose 4.3 percent to close at $31.90.
Wells Fargo has managed to remain profitable during the credit crunch, while Citi is looking to turn around its ailing business after posting about $60 billion in write-downs and losses during the year.
A person familiar with the matter said on Tuesday that Citigroup and Wells Fargo were leaning toward a geographical division of Wachovia's branches, with Citigroup taking Northeastern and Mid-Atlantic branches and Wachovia taking Western and Southeastern branches.
Wells Fargo would end up with about 75 to 80 percent of Wachovia's deposits, while Citi would get the rest. But the situation was in flux and still subject to change, the person said.
The Wall Street Journal reported on Wednesday that Citigroup was looking for help from outside partners to take a higher proportion of the deposits.
Two judges on Wednesday postponed court hearings as the parties extended the legal truce and continued to negotiate.
New York State Supreme Court Justice Charles Ramos postponed a hearing to October 14 from Friday on Citigroup's action to stop Wachovia and Wells Fargo merging, the judge's clerk said.
U.S. District Court Judge Lewis Kaplan postponed a hearing indefinitely into Wachovia's attempt in federal court to prevent Citigroup from stopping Wells Fargo, according to court documents. The hearing had been scheduled for Wednesday.
A transcript of a conference call on Wednesday between Kaplan and the lawyers for Citigroup and Wachovia revealed how the steep declines in the markets weighed on the talks and the decision to postpone the hearing.
"This is a standstill that the Fed has insisted on because of concern as to what's going on in the market," Citigroup attorney Greg Joseph said, according to the transcript. "Having the hearing could affect market activity."
Wachovia's attorney David Boies said he agreed with Joseph.
Boies said Citigroup and Wells Fargo were negotiating about a "possible grand solution that would preserve the shareholder value for Wachovia as represented by the Wells Fargo deal, but that would involve not a single choice between Citigroup and Wells Fargo."
Kaplan asked Citigroup to file papers later on Wednesday and for Wachovia to file its response papers on Thursday to prepare for any possible hearing at the end of Friday's deadline.
"My concern here is that, if this is ultimately to be resolved by me, it's a matter of enormous consequence, both to the parties and to the markets," Kaplan said.
A third hearing brought by shareholders in North Carolina has also been postponed, to October 13 from Thursday.
(Additional reporting by Elinor Comlay and Grant McCool; Editing by Tim Dobbyn and Andre Grenon)