Wachovia will snub Citigroup and jump into the arms of Wells Fargo instead, seeking to upend a government-arranged rescue of the troubled bank in favor of a more traditional merger, Wells Fargo announced this morning
The reaction from federal regulators was chaotic, suggesting the announcement had surprised them.
The Federal Deposit Insurance Corp., which arranged the Wachovia-Citigroup deal, said it intended to uphold that deal.
"The FDIC stands behind its previously announced agreement with Citigroup," FDIC Chairman Sheila Bair said in a statement. "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."
The Federal Reserve and the Office of the Comptroller of the Currency, which regulate Wachovia and Wells Fargo, also issued a statement saying they had not yet been able to review the deal "and the issues that it raises."
The new deal would pay Charlotte-based Wachovia shareholders $15.1 billion instead of the $2.2 billion offered by Citigroup. Wells Fargo also said it will not need a government backstop, something Citigroup had demanded.
If this deal is completed, it will create one of the nation's largest retail and commercial banks, with branches from coast to coast, but unlike its major rivals Bank of America and J.P. Morgan Chase, only a small presence on Wall Street.
Wells Fargo, which is based in San Francisco, would become the largest bank in the Washington area.
The deal "makes compelling business and strategic sense and is simply an incredible fit that will result in an immensely strong, stable financial services company," Wells Fargo Chairman Richard Kovacevich said.
Wells Fargo chief executive John Stumpf said that the companies had spoken with regulators and that the deal would go through.
"We feel very confident that this transaction has been done appropriately and will continue and be consummated," he said.
Wachovia was laid low by a series of bad deals in recent years, culminating in 2006 with the $25 billion acquisition of Golden West Financial, a major California mortgage lender. As the housing market and the economy weakened, Wachovia found itself holding large numbers of troubled loans.
By last weekend, federal regulators were increasingly concerned that the company might collapse, forcing the FDIC to cover its depositors.
Under the now-defunct sale to Citigroup, which was urged by federal regulators and announced last Monday, the New York-based banking colossus would have purchased Wachovia's banking business. In exchange, the FDIC promised to limit Citigroup's losses on a $312 billion portfolio of Wachovia's most troubled loans. The government agreed to absorb all losses beyond $42 billion in exchange for a $12 billion stake in Citigroup.
Wachovia chief executive Robert K. Steel hailed the Wells Fargo deal as a vast improvement both for taxpayers, who are now off the hook, and for his own shareholders.
The merger "enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Steel said. "The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complementary, and this combination creates great potential for stability and growth."
Wells Fargo is in a position to buy Wachovia because the bank was far more conservative in recent years than many of its rivals. While Wells Fargo was one of the nation's largest mortgage lenders -- and one of the largest subprime lenders -- the company avoided the worst excesses of its rivals, dealing more cautiously with its customers. Wells Fargo also has little presence on Wall Street, and largely avoided the investments in mortgage-related securities that are damaging other banks.
Wells Fargo said it would write down $74 billion in losses on Wachovia's loan portfolio, far more than the $42 billion in write-downs projected by Citigroup. Wells Fargo said it would raise up to $20 billion from investors to help cover those costs.
A deal between Wells Fargo and Wachovia was almost signed last weekend, but Wells Fargo walked away on Sunday afternoon, citing concerns about the projected losses on some of Wachovia's loans. The government was forced to turn to Citigroup instead.
Kovacevich said this morning that Wells Fargo simply wasn't ready to make a deal on Sunday.
"We have to be comfortable before we will ever make a decision," he said during a conference call with analysts. "It took this much time to be comfortable and that's why we're here today."
The deal marks a sharp reversal of fortunes for Citigroup, which on Monday appeared to have paid a pittance for something it wanted and needed -- a major presence in the retail banking business. Wachovia's large deposit base offered Citigroup a massive and cheap source of funding at a time when other sources of funding are becoming more expensive and harder to tap. Citigroup's executives hailed the deal as offering a rare combination of great opportunity and low risk because of the government backstop.
A Citigroup spokesman did not immediately return a call for comment.
