In a surprise announcement, Wells Fargo agreed to buy Wachovia for more than $16 billion, four days after Citi had agreed to acquire Wachovia’s banking operations in a government-backed deal that involved the Treasury Department and the Federal Reserve.
The Federal Deposit Insurance Corp (FDIC) announced a shotgun merger proposal between Citi and Wachovia on Monday, with the FDIC agreeing to absorb up to $42 billion in losses should Wachovia’s $312 billion pool of loans later turn sour.
The deal, reached in consultation with President George W. Bush, also allowed the FDIC to receive $12 billion in preferred stock and warrants from Citi for taking on possible future risks.
A deal with Wells Fargo, if consummated, could wipe out potential risks to the government and taxpayers that a government-approved Citi deal would include. But Citi on Friday demanded that Wells Fargo drop its bid for Wachovia, saying that Wachovia had breached an agreement to negotiate with Citi exclusively.
The FDIC said it stood by the Citi deal, but at the same time left open the possibility of accepting Wells Fargo’s proposal after reviewing it with other regulators.
FDIC Chairman Sheila Bair said in a statement that the new offer “does not require FDIC assistance.”
“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.
In a joint statement, the Fed and the Office of the Comptroller of the Currency said they had not yet reviewed the new Wells Fargo proposal, but they had reviewed Citi’s bid extensively.
“We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,” the Fed and OCC said.
“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 central bank regulates bank holding companies, and the OCC 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.
“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,” Bair said.
In either case, Bair said, all banking customers of the merged institutions would be fully covered, with no disruptions in service.
So far this year 13 banks have failed, including Washington Mutual Inc WAMUQ.PK and IndyMac Bancorp Inc IDMC.PK, and more failures are expected over the next several months.
Banks received a lift this week when securities regulators gave the financial industry 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 have complained that fair-value accounting rules, also called mark-to-market, have posed obstacles for consolidation of banks that are in need of rescuers.
Additional reporting by Dan Wilchins in New York; editing by Gerald E. McCormick/Jeffrey Benkoe