NEW YORK — Under pressure from the federal government, Citigroup Inc. and Wells Fargo & Co. were locked in negotiations Sunday night aimed at trying to defuse the battle for Wachovia Corp., according to people familiar with the situation.
In a sign that officials are concerned about the increasingly volatile situation, officials from the Federal Reserve were pushing hard for Citigroup and Wells Fargo to reach a compromise. That effort could result in essentially carving up the Charlotte, N.C., bank between its two suitors, these people said.
Under the leading plan being discussed Sunday night, Citigroup and Wells Fargo would divvy up Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California, according to people familiar with the talks. Wells Fargo would take over Wachovia's asset-management and brokerage units.
Unlike Citigroup's original agreement to take over Wachovia, in which the Federal Deposit Insurance Corp. agreed to shoulder potentially hundreds of billions of dollars in toxic loans, the plans being discussed Sunday night don't entail either buyer receiving financial assistance from the U.S. government, according to a person briefed on the talks.
Regulators and bankers are scrambling to quickly end the drama, in part out of concern that if Wachovia remains in limbo when U.S. markets open Monday morning, it could further spook already jittery investors and bank customers.
Hoping to increase the likelihood that an agreement will be reached, Wachovia was excluded from the weekend talks. "We have no say in it," one person close to Wachovia said.
The weekend negotiations were being led by senior Federal Reserve officials. The Treasury Department was also involved, but Secretary Henry Paulson recused himself from the talks because of his ties to Wachovia Chief Executive Robert Steel, a former top Treasury official before taking Wachovia's helm in July, according to a person familiar with the matter.
Without some sort of compromise, the fate of Wachovia could drag out for weeks or months in a legal battle that leaves the battered bank in limbo, distracted by controversy and further weakened by the mountain of bad loans that led to its government-engineered deal with Citigroup a week ago.
Even as negotiations to split up Wachovia were proceeding, lawyers for Wachovia and Citigroup were sparring in federal court in New York on Sunday afternoon. Wachovia asked a U.S. District Court judge to decide whether Wachovia had the right to renege on Citigroup's tentative agreement to buy Wachovia's banking business for $2.1 billion. A follow-up hearing was set for Tuesday.
The wrangling followed a Saturday night ruling by a state-court judge that extended the expiration of Citigroup's agreement until Friday.
The fact that Citigroup and Wells Fargo are duking it out for Wachovia, which was seen as in perilous condition barely a week ago, ought to be an encouraging sign for the shaky U.S. banking industry. But the second straight weekend of frantic negotiations also highlights how vulnerable the industry is to panicky customers and how the U.S. government is increasingly playing a significant role in the fate of major financial institutions.
The talks this weekend capped a frenetic 10 days of negotiations.
After agreeing in principle to a shotgun marriage early last Monday morning, Citigroup and Wachovia spent the next several days trying to hammer out the specifics of the deal, which called for Wachovia shareholders to receive just $1 a share for most of the company.
On Wednesday, New York-based Citigroup offered to boost the amount it was paying to buy most of Wachovia, and that proposal remains on the table, according to people familiar with the matter. The terms of that revamped proposal weren't clear and were delivered before Wells Fargo's surprise offer on Thursday night.
People close to Wachovia confirmed that Citigroup made a newer offer and that it did go before the board. But these people said the offer was still "many dollars" lower than Wells Fargo's bid, that it was not for the whole company, and that Citigroup wanted Wachovia to reassume certain liabilities.
Also, a person close to Wachovia said as late as Thursday that Citigroup was still trying to renegotiate terms that had been agreed to verbally by the banks' two chief executives, Citigroup's Vikram Pandit and Wachovia's Mr. Steel, including the ultimate location of the retail-banking operations, severance and certain benefits.
A key issue in the unfolding legal fight between the three banks is an "exclusivity agreement" between Citigroup and Wachovia. That pact restricted Wachovia from entering into merger discussions with any other bank. But a provision in the federal financial-system bailout added a wrinkle to the situation, rendering unenforceable certain agreements that restrict merger talks between banks.
On Saturday night, Citigroup persuaded a New York state-court judge to extend the exclusivity agreement signed by Wachovia and Citigroup until Friday, according to Wachovia lawyer David Boies. Lawyers for Citigroup visited the judge, Charles Ramos, at his beach home in Cornwall, Conn., without anyone from Wachovia initially present, according to people familiar with the matter. Toward the end of the meeting, Wachovia's general counsel was allowed to dial in by phone.
The discussions lasted for about 20 minutes, but there was no speaker-phone hookup, making it difficult to hear the arguments being made by Citigroup on the other end, one person close to Wachovia said.
Despite Mr. Ramos's ruling Saturday, Wells Fargo and Wachovia planned Sunday to push ahead with their integration discussions, said the people close to Wachovia. They noted that the judge's order doesn't stop San Francisco-based Wells and Wachovia from preparing filings needed to gain approval from regulators and Wachovia shareholders.
Still, Wachovia sought to overturn the restraining order. On Sunday afternoon, the company went to federal court in Manhattan to try to get the order overruled. Wachovia not only questioned the manner in which Judge Ramos issued the Saturday-night restraining order but also argued that the exclusivity agreement was essentially voided by the federal bailout law.
A U.S. District Court judge didn't rule on the dispute Sunday but did say both sides had until the hearing scheduled for this Tuesday to submit briefs.
The Saturday-night drama represents Judge Ramos's latest appearance in the spotlight during a major financial court battle. In 1990, he upheld the X rating of the movie "Tie Me Up! Tie Me Down!" In 2002, he called "offensive" the fees claimed by lawyers in a tobacco-related lawsuit. In 2006, he refused to remove himself from a case involving the paycheck of former New York Stock Exchange boss Richard Grasso despite applying twice for a spot on the NYSE board.
The Wachovia-Citigroup legal spat highlights how an obscure provision buried in a hastily negotiated piece of federal legislation has the potential to upend a precarious merger.
The provision was inserted into the rescue legislation last week, at the behest of the FDIC, according to people familiar with the matter. The aim was to reduce the government's exposure to Wachovia losses under the original Citigroup deal. Lawyers said the clause appears to defang the exclusivity pact between Wachovia and Citigroup.
A spokesman for Wells Fargo, Larry Haeg, said the bank believes the statutory language "invalidates Wachovia's claimed exclusivity agreement with Citi." But Mr. Haeg said the bank had "no role in suggesting the language."
"We understand its purpose is to ensure that any institution can participate in bidding for troubled banks," he said.
Citigroup officials were caught off-guard by the provision, with senior officials not being aware of its existence until Friday afternoon — after President George W. Bush had already signed the bill into law. Citigroup executives argued that the provision also could invalidate Wachovia's subsequent deal with Wells Fargo — an assertion that those banks dismissed.