agree on Republic's potential liability for losses incurred from possible securities fraud by a Republic client, Princeton Economics International Inc., sources close to the two banks said Thursday.

Republic's headache has become HSBC's problem because the London banking company had agreed to buy Republic for $10.3 billion last May, before news of the scandal broke. The agreement has come under renewed scrutiny by HSBC as a result of the difficulty in determining Republic's actual liability. The alleged fraud cost Japanese investors as much as $1 billion.

Both banking companies now favor a solution under which Republic would buy additional insurance against possible claims by investors and Edmond Safra, Republic's honorary chairman and biggest shareholder, would accept a lower payment for his 29% stake in the bank. The sticking point is how much less.

A source close to Republic said press reports that Mr. Safra is willing to accept $1 billion less than the $3.3 billion originally agreed to are "laughable." The sources also denied that an agreement is near.

"The pieces are on the table, but the two banks are still talking about their differences and how those gaps can be closed," said a banking source.

Market scuttlebutt was that stock-arbitrage fund managers were eager to drive up the Republic stock price. They have been nervous in recent weeks as the deal failed to move forward and have been eager to see the price rise so they can unwind their positions at less cost or more profit to them, according to the scuttlebutt.

"The arbs have sizable amounts of stock, and they're coming under increasing pressure," said one source.

After the newspaper reports, Republic's shares rose sharply in morning trading to a daily peak of $68.6875, from $64.625 at Wednesday's close. The stock closed Thursday at $68.375.

Among funds that have been trading in Republic stock, according to sources, were Harvest Management Inc., Perry Capital Corp., Mentor Investment Group, and SAC Capital Management LLC. Also named were Lehman Asset Management, a unit of Lehman Brothers Holding Inc., Citadel Partners, and Chesapeake Partners.

Asked whether SAC still held Republic stock, a manager for the fund said, "We are short-term equity sellers, we buy and sell, we don't buy and hold."

The heart of the dispute is over Republic's possible exposure. The deal was expected to close in the fourth quarter but was delayed after federal prosecutors charged Martin Armstrong, founder and chairman of Princeton Economics, with defrauding Japanese corporate customers of nearly $1 billion worth of securities.

Republic, which acted as a custodian for securities held by the fund, also came under investigation over whether one of its officers sent Japanese investors letters falsely assuring them that the value of their accounts held by Republic was the same as reported by Princeton.

"The difficulty is how do you determine the extent to which there is liability, whether or not claims will be brought by the Japanese companies that bought the notes, and whether or not those claims will eventually be upheld by a court," said one well-placed source.

Both Republic and HSBC declined to comment on the reports. If agreement is reached, the deal still would have to be approved by the New York State Banking Department.

HSBC is well known for meticulously scrutinizing its potential liabilities when making an acquisition. The company recently pulled out of a $900 million deal to buy South Korea's SeoulBank after failing to agree with the South Korean government on the amount of possible bad loans still held by the bank.

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