Citigroup Concedes Wachovia to Wells Fargo

By Jason Simpkins
Associate Editor
Money Morning

The much-ballyhooed battle between Citigroup Inc. (C) and Wells Fargo & Co. (WFC) ended with a whimper Friday, as Citi gave up its pursuit of the assets of Wachovia Corp. (WB) – the Charlotte-based lender that was undermined by its broad exposure to subprime assets.

On Sept. 29, Citigroup bid $2.2 billion for Wachovia’s banking operations, but left both Wachovia’s A.G. Edwards brokerage unit and its Evergreen mutual fund family on the table. That left the door open for Wells Fargo to swoop in four days later with a $12 billion bid for all of Wachovia’s operations. That includes a $498 billion loan portfolio that carries $122 billion of option adjustable-rate mortgages (ARMs), of which Citi wanted no part.

The acquisition of Golden West at the height of the housing bubble made Wachovia the largest holder of option ARMs, which are prone to default because their principle payments reset at higher levels over a specified period of time. The risk involved with taking on Wachovia’s entire asset portfolio was apparently too much for Citi to stomach.

“Following several days of negotiations, we continued to have dramatically different views regarding risks involved in the transaction,” Citigroup Chief Executive Officer Vikrim Pandit said in a memo to employees. “As I said from the beginning, Citi does not need to do this transaction. We were willing to pursue it only if we could limit the risk and generate value for shareholders.”

However, by agreeing to take on those risky assets, Wells Fargo will become the largest U.S. bank by branches, with 10,761 branches in 39 states. Also, more than half of Wachovia’s branches are on the East Coast, while Wells’ previous territory stretched from its home state of California to Texas and Minnesota. That gives Wells Fargo true coast-to-coast exposure, as well as $787 billion of deposits and $1.42 trillion in assets.

It (the Wachovia deal) provides Wells Fargo with the opportunity to become a national banking franchise at a much lower cost than cobbling several one-off transactions together,” Stifel Financial Corp. (SF) analyst Christopher Mutascio said in a note to clients.

Meanwhile, Citigroup is left with the daunting task of trying to keep pace not only with Wells Fargo, but with JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC), which have struck deals of their own.

JPMorgan took over The Bear Stearns Cos. Inc. in March, and then in September paid $1.9 billion to the Federal Deposit Insurance Corp. (FDIC) for Washington Mutual’s deposits, retail branches, and loan portfolio. And Bank of America jumped in on July 1 to snap up the operations of dying mortgage leader Countrywide Financial Corp. and followed that up with the September acquisition of Merrill Lynch & Co. Inc. (MER).

Charles Carlson, a money manager at Horizon Investment Services LLC, told Bloomberg News that Citigroup missed a big opportunity to keep pace with rivals that have expanded by acquiring troubled institutions.

“The more Citi could beef up its operations and be part of the big bank club, the better,” Carlson said. “I'm not sure this is going to be viewed as good for Citi.”

Citi still intends to sue Wells Fargo for $60 billion in damages on the grounds that news of the competing bid caused its share price to significantly decline.

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