Wells Fargo Buys Wachovia Wells Fargo has stunned financial markets by announcing a merger with Wachovia. Wachovia was involved in a government-brokered deal with Citigroup earlier in the week. The Wells Fargo deal puts the Federal Deposit Insurance Corporation in an awkward position.
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Wells Fargo Buys Wachovia

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Wells Fargo Buys Wachovia

Wells Fargo Buys Wachovia

Wells Fargo Buys Wachovia

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Wells Fargo has stunned financial markets by announcing a merger with Wachovia. Wachovia was involved in a government-brokered deal with Citigroup earlier in the week. The Wells Fargo deal puts the Federal Deposit Insurance Corporation in an awkward position.

ROBERT SIEGEL, host:

From NPR News, this is All Things Considered. I'm Robert Siegel. This week began with news of a big merger between two banking giants, Wachovia and Citigroup. Well, now it seems that Citigroup has been left standing at the altar. Today, Wachovia said it was backing out of the deal, which was brokered by federal regulators, and taking up with Wells Fargo instead. It says Wells Fargo offered a better deal. As NPR's Jim Zarroli reports, it may not be that simple.

JIM ZARROLI: You might not think that the banking business could stand too much more turmoil and uncertainty, but the announcement today that Wachovia was merging with Wells Fargo had people everywhere scratching their heads. Federal regulators had grown alarmed by the heavy mortgage losses at Wachovia, and over the weekend, they had scoured the industry looking for a white knight. Wells Fargo had been among the banks that considered a deal only to say, no thanks, in the end. Then early this morning came word that Wells Fargo had changed its mind. What had happened? In a conference call today, Wells Fargo's Chairman Richard Kovacevich, said the company had simply needed more time to study Wachovia's books.

Mr. RICHARD KOVACEVICH (Chairman, Wells Fargo): And we have to be comfortable before we will ever make a decision, and it took this much time to be that comfortable and that's why we're here today.

ZARROLI: Still the decision to scrap the deal had Citigroup fuming and Citigroup officials dropped hints of legal action if Wells Fargo didn't back off. Asked about that possibility today, Kovacevich chose his words carefully.

Mr. KOVACEVICH: We feel very confident that this transaction has been done appropriately, and we'll continue and be consummated and we'll go forward with it.

ZARROLI: The truth is, scrapping the earlier deal makes a certain sense. For one thing, Citigroup had demanded that the federal government absorb some of Wachovia's bad debt which could have cost taxpayers billions of dollars. Wells Fargo made no such demand. Wells Fargo wants to acquire branches on the East Coast. Wachovia has a lot of them. Derick Ferver is an analyst at SNL Financial.

Mr. DERICK FERVER (Analyst, SNL Financial): I think it's an excellent deal for everyone all around. It's just a matter of whether, you know, Wells Fargo can, you know, get around whatever papers were signed to Citigroup.

ZARROLI: The question now is whether Citigroup can force Wachovia to honor the original deal. James Cox, Professor of Finance at Duke University, thinks it may have some trouble on that score. He says Wachovia's board may have agreed to the earlier merger, but the merger hasn't been approved by shareholders, and until it is, Wachovia's board can walk away. In fact, Cox says, it may have to.

Mr. JAMES COX (Professor of Finance, Duke University): Directors of a public company like Wachovia are under a fiduciary obligation to serve the interests of their shareholders, and they would not be serving the interests of their shareholders if they enter into a contract in which they said, we will close our eyes to all better offers after this point in time.

ZARROLI: There's also the question of how federal regulators will respond to the new deal. They helped broker the original merger, and today they said they'll stand by it. But they also gave themselves some wiggle room, promising to review any new offers that come in. In fact, allowing the deal to collapse would save the federal government a lot of money at a time when it's already absorbing many billions in new debt. Regulators may be publicly supporting the deal, but privately praying it fails. Jim Zarroli, NPR News, New York.

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Judge Blocks Wells Fargo Purchase Of Wachovia

A New York judge on Saturday blocked Wells Fargo & Co.'s attempt to purchase Wachovia Corp.

Citigroup said in a statement that New York Supreme Court Judge Charles Ramos temporarily halted the sale of Wachovia. Responding to a petition by Citigroup, the judge called for a meeting between representatives of Citigroup and Wachovia on Oct. 10.

Wells Fargo & Co. stepped in Friday to purchase Wachovia Corp. in a $15.1 billion bid to catapult the new company into the top echelon of financial services. But Citigroup said the deal was "in clear breach" of an earlier agreement for Citigroup to acquire Wachovia's banking operations.

The Wells Fargo agreement calls for the complete merger of Wells Fargo and Wachovia with no federal assistance. Wells Fargo said it will acquire all of Wachovia's businesses, including its debt in a "stock for stock" transaction. As part of the deal, Wells Fargo, which is based in San Francisco, would gain control of all outstanding shares of Wachovia's common stock. Wachovia is based in Charlotte, N.C.

Analysts were surprised by the announcement, which both companies said was "definitive," because it comes on the heels of a deal brokered by the Federal Deposit Insurance Corp. on Sept. 29 to sell Wachovia to Citigroup. Under the terms of that deal, Citigroup would have acquired all of the banking operations of Wachovia, and Wachovia would have kept ownership of its securities divisions, including Wachovia Securities, AG Edwards and Evergreen.

Citigroup would have absorbed up to $42 billion of losses from Wachovia's $312 billion pool of loans. And the FDIC would have absorbed additional losses in exchange for receiving $12 billion in preferred stock and warrants as compensation for taking on the risk.

On Friday, Citigroup said that Wachovia's agreement to enter into a deal with Wells Fargo violated an exclusivity agreement between Citigroup and Wachovia. Citigroup also said Wells Fargo engaged in "tortious interference."

FDIC Stands Behind Citigroup Agreement

In an unusual twist, FDIC Chairman Sheila Bair said in a statement issued Friday that the agency "stands behind its previously announced agreement with Citigroup." Bair said 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." Historically, the FDIC has no oversight over bank mergers and acquisitions.

Wells Fargo said it plans to maintain Wachovia's banking offices in Charlotte and its securities offices in St. Louis as part of the deal. The combined company will have $1.42 trillion in assets and $787 billion in deposits. It will also have bank locations in 39 states and the District of Columbia.

"They'd be a top-three bank in the U.S.," says Matthew Warren, an equity analyst for Morningstar. "It will be one of the largest depositories in the country."

The larger deposit base will give the combined company economies of scale and will enable it to compete with JPMorgan Chase and Bank of America with a "nationwide banking presence," he says.

Merrill Lynch, which Bank of America purchased in mid-September for $50 billion, has the largest team of brokers in the U.S. And On Sept. 25, JPMorgan Chase acquired the assets of Washington Mutual — previously the nation's largest savings and loan — in a deal brokered by the FDIC for $1.9 billion.

Warren says the Wells Fargo-Wachovia deal was driven by Wells' interest in acquiring the "second-largest brokerage army" to foster cross-selling of services for both banking and wealth management clients.

The agreement will require the approval of Wachovia's shareholders and federal regulators. Wells Fargo's board has already approved the offer. Wells said the merger costs are likely to be close to $10 billion and that it would issue up to $20 billion in common stock to raise additional capital.

Warren says Wells Fargo is "the only AAA-rated bank in the country" and that it has strong capital levels. Regardless, the bank still needs to raise capital to "support this opportunistic deal," he says.

Wells Fargo Chairman Dick Kovacevich said in a prepared statement that the merger "provides superior value" compared with the FDIC-brokered deal whereby only the banking operations of the company would be acquired by Citigroup.

Robert Steel, president and CEO of Wachovia, struck a similar chord in a press release. He said the agreement "enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," adding that the two firms have businesses that were "extraordinarily complementary."