Image: A Wachovia banking branch
Shannon Stapleton  /  Reuters
Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., in response to a question from an audience member at the National Association of Business Economists conference about the fate of Wachovia, said: “I think we will have one (resolution) today” that is in accord with the public interest. She did not elaborate.
updated 10/6/2008 6:56:57 PM ET 2008-10-06T22:56:57

Wachovia, Citigroup and Wells Fargo on Monday agreed to a standstill of all formal litigation activity — a sign that the banks and the Federal Reserve are working feverishly to reach an agreement over the fate of Wachovia.

The standstill agreement will end at noon on Wednesday, unless extended.

“We are pleased to participate with the Federal Reserve Board in a fair-minded, good faith process to achieve a prompt and successful outcome,” said Citigroup spokesman Michael Hanretta in an e-mail to The Associated Press.

Federal Reserve officials have been in talks with Wells Fargo and Citigroup in the hope of getting the parties to come to some sort of agreement, according to a person with knowledge of the talks. The person spoke on condition of anonymity because of the sensitive nature of the matter.

The Wall Street Journal reported Monday that the discussions could result in the two suitors carving up Wachovia Corp.’s network of 3,346 branches along geographic lines, citing people familiar with the situation.

Early last week, New York-based Citigroup Inc. agreed to buy Wachovia’s banking assets for $2.1 billion in a deal brokered by the Federal Deposit Insurance Corp. In a surprising twist of events, San Francisco bank Wells Fargo & Co. announced Friday that it agreed to acquire Wachovia in a deal worth $15.1 billion at the time, or $14.4 billion based on Wells Fargo’s closing price Monday of $33.64. Wells Fargo’s deal did not require any government support.

The battle between Citigroup and Wells Fargo for Charlotte, N.C.-based Wachovia moved to both state and federal court over the weekend.

All of the parties involved have stressed the urgency of reaching a resolution, as a prolonged court fight could further weaken the ailing Wachovia.

“If this goes into a protracted legal battle, everybody loses,” said Frederick Cannon, an analyst at Keefe, Bruyette & Woods in an interview with The Associated Press. “Wachovia is big enough that it would be a negative for the financial system. Given that situation, we will see a resolution pretty quickly.”

Roger Cominsky, a partner in the financial institutions and lending group at the law firm Hiscock & Barclay, added that the eventual buyer will want the deal done as fast as possible to preserve the highest value of Wachovia, while the FDIC wants to avoid a potential run on the bank if the fight is drawn out.

Wachovia, like many banks, has been slammed over the past year by defaulting mortgages, particularly in its portfolio of option adjustable-rate mortgages, which allowed many customers to pay less than the monthly interest owed on the loan.

It was clear from documents filed in federal court Sunday that Wachovia was in considerable trouble when it agreed to the Citigroup deal. Wachovia disclosed that it agreed to the deal “with the understanding that a seizure of its banking assets later that day by the Federal Deposit Insurance Corp. would occur” unless it accepted Citigroup’s proposal.

Earlier Monday, Citigroup sued Wachovia, Wells Fargo and the directors of both companies, seeking more than $60 billion in damages for interfering with the bank’s planned takeover of Wachovia’s banking operations.

The complaint, brought on Saturday and filed Monday in New York Supreme Court, seeks more than $20 billion in compensatory damages and more than $40 billion in punitive damages from Wells Fargo for tortious interference. Citigroup also seeks relief from Wachovia for what it called its bad-faith breach of the banks’ contract.

In an additional statement, Citigroup said it delivered an “executed copy” of its agreement with Wachovia to Wachovia’s counsel late Sunday. At the time the Wachovia-Wells Fargo deal was announced, Citigroup and Wachovia had agreed and were simply finalizing documents, Citigroup said.

The standstill agreement reached late Monday immediately halts this and all other litigation activity.

On Sunday, the Appellate Division of the New York State Supreme Court dismissed an order issued late Saturday by Justice Charles Ramos at Citigroup’s request that would have extended the time Citigroup had to complete its acquisition of Wachovia.

The fight was also waged in federal court, where Wachovia asked U.S. District Judge John Koeltl to declare invalid part of the Citigroup deal that would have restricted Wachovia from considering competing bids.

Also Sunday, a county court in North Carolina ruled against Citigroup in its battle for Wachovia. The Superior Court Division of Mecklenburg County General Court of Justice in North Carolina issued a temporary restraining order on behalf of two Wachovia shareholders prohibiting Citigroup from enforcing provisions of its takeover bid of Wachovia. The provisions restrict Wachovia’s ability to negotiate other potential deals.

Wachovia shares dropped 43 cents, or 6.9 percent, to close at $5.78. Citigroup shares fell 94 cents, or 5.1 percent, to $17.41, while Wells Fargo shares slipped 92 cents, or 2.7 percent, to $33.64.

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