Court tilts Wachovia fight toward Wells

October 5, 2008 6:02:03 PM PDT
The battle for control of troubled bank Wachovia tilted toward Wells Fargo Sunday as a federal judge temporarily block a New York state court ruling that had favored rival bidder Citigroup.At stake is the $339 billion in Wachovia deposits and its network of more than 3,300 branches throughout the country that would solidify the winner as being in the top tier of U.S. retail banking.

The Sunday ruling set the stage for a hearing on Tuesday in federal court in lower Manhattan. But with both Wells Fargo and Citigroup vowing to press their legal rights to a deal with Charlotte-based Wachovia, analysts warned that a prolonged takeover fight carries enormous risk at a time when the nation's financial system is under the worst stress since the Great Depression.

"I would hope there would not be a long battle because that does not bode well for Wachovia's existing business," said Ben Halliburton, chief investment officer at Tradition Capital Management in Summitt, N.J. "Any delays in action and uncertainty ... just causes further problems for the operating entity."

U.S. District Judge John Koeltl late Sunday blocked an order by New York State Supreme Court Justice Charles eement "is valid, proper and not prohibited by a letter agreement between Wachovia and Citigroup."

After a short hearing, Koetl temporarily vacated Ramos' order and scheduled another hearing for Tuesday so Citigroup could respond.

Citigroup said in a statement announcing Ramos' ruling late Saturday it "is prepared to continue negotiations with Wachovia on the parties' previously agreed-to transaction."

It was quite possible that litigation among the three banks could go on for some time; any ruling by either judge was likely to be appealed. A protracted court fight raised the possibility that Wachovia, already hurt by billions of dollars in losses from failed mortgages, will further weaken. However, the government, which has closed and then seized failing banks including Washington Mutual Inc., the nation's largest thrift, would likely step in if the bank were in jeopardy.

Wachovia is among the banks whose billions of dollars in losses from bad mortgage bets ultimately led to the government's $700 billion plan to buy bad assets from banks and other institutions to shore up the financial industry.

Wachovia spokeswoman Christy Phillips-Brown said in a statement Sunday the company believes its agreement with San Francisco-based Wells Fargo is "proper, valid and ... in the best interest of shareholders, employees and the American taxpayers."

She said Citigroup is free to make a better offer to Wachovia under that agreement.

Wells Fargo said Sunday it has "a firm, binding merger agreement" with Wachovia.

"That agreement represents a transaction that, in stark contrast to Citigro have also plunged in value. The heavy losses led to the failure not only of WaMu and a number of smaller banks, but also the government-brokered sale of Bear Stearns Cos. to JPMorgan Chase & Co. and the bankruptcy filing of Lehman Brothers Holdings Inc.

Despite its escalating loan losses, Wachovia is still worth far more than either Citigroup or Wells Fargo is offering, said Herb Sandler, the former co-chief executive of Golden West Financial Corp. Wachovia picked up about $122 billion in option ARMs when it bought Golden West and its thrift, World Savings in 2006 for $24.3 billion.

Arguing the projected losses on the World Savings loan portfolio have been grossly exaggerated, Sandler believes Wachovia is still worth at least $60 billion. "This is still a viable company," said Sandler, who declined to disclose how many shares he still owns in Wachovia. He and his wife received Wachovia stock worth more than $2 billion at the time the deal closed.

New York-based Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the most write-downs of any U.S. bank.


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