Citi or Bust?

October 6, 2008

The site of a new Wells Fargo & Co. branch is seen in Waco, Texas, October 5, 2008. Wachovia Corp said on Sunday that it will pursue a deal to sell itself to banking rival Wells Fargo & Co. despite an attempt by Citigroup Inc to block the deal. Citigroup, the largest U.S. bank, is also courting hobbled Wachovia and late on Saturday said it had won a court order blocking Wells Fargo from buying Wachovia until the court ruled. REUTERS/Larry Downing (UNITED STATES)It seemed like the natural order of things had returned for a short while last week. Wells Fargo had outbid Citigroup to take over Wachovia, and as an added treat, they did not plan to tap government funds to do it. Apparently caught unawares, the jilted suitor sued saying its exclusivity agreement had been broken. If the parties had had a signed merger deal, rather than just an exclusive agreement to talk, Wachovia would have been obliged to pay Citi some kind of break-up fee. But the waters are murkier this time. So instead, the now fully engaged Federal Reserve is acting as broker in what has become a frantic legal spat between the banks.

The Wall Street Journal reported that the Fed is pushing the two banks to compromise by potentially carving up Wachovia between them. Having already decided a purchase of Wachovia is an issue that has significance for the stability of the financial system, the Fed continues to view resolving the confusion over who is buying one of the nation’s biggest banks as important, a Treasury source told us, adding that discussions were continuing late last night.

What could motivate the Fed to intrude where the free market seemed to be working so well? Citi shares saw their first substantive rally in a long while when their Wachovia deal was announced. It was getting a sweet deal, with government backing, that was seen as a game changer for the mammoth bank. Without that deal, the Fed may be more worried about what to do about Citi than whether a Wells, Wachovia deal makes sense.

Who will win the battle for Wachovia? Place your bets in the news prediction website Hubdub:

Deals of the day:

* BNP Paribas has scooped up Fortis‘s assets in Belgium and Luxembourg to become the euro zone’s biggest deposit bank after a weekend of frantic talks with the authorities in the two countries eager to stem a cash drain on Fortis and Dexia banks.

* The Australian unit of H.J. Heinz will buy food producer Golden Circle in a deal valuing the canned fruit and juice producer at about A$288 million ($220 million), the companies said.

* British outsourcing group Xchanging and its Mauritius unit have made an open offer to acquire 20 percent of Cambridge Solutions at 81.11 rupees a share, according to a notice in a newspaper.

* Thai steel firm G Steel said that Japanese trading house Mitsui & Co planned to acquire a stake in it.

* Hungary’s MOL has won 21.7 percent of Croatian oil group INA in a public bid, raising its stake to 46.7 percent, but it may still gain a majority as final results will be known only later this week.

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