Federal regulators forced Wells Fargo & Co. and Citigroup Inc. to call a timeout Monday in their litigation over who will buy Wachovia Corp. The move came shortly after Citigroup capped a weekend of legal dogfights by suing the other banks for $60 billion.
The three banks were in discussions "with everything on the table," including splitting up the sprawling Wachovia branch system that both Wells Fargo and Citigroup covet, two people close to the talks said. They spoke on condition of anonymity because they were not authorized to give details beyond what was contained in a terse statement issued in the name of the three banks.
The statement said the banks, "in consultation with the Federal Reserve," had put on hold until noon Wednesday several lawsuits filed in federal and New York state courts. The bank regulators insisted on the hiatus, according to the people familiar with the discussions.
The dispute centers on Wells Fargo's signed agreement, announced Friday, to acquire Wachovia for $15 billion in stock. That shattered a tentative deal announced four days earlier, in which Citigroup was to pay $2.2 billion for Wachovia's branches and shoulder its troubled loans and bond debt.
The Citigroup agreement was brokered by the Federal Deposit Insurance Corp., which had feared that Wachovia would run short on cash and fail. Citi said it entered into the deal believing that it had the full backing of the government.
The Citigroup-Wachovia deal would leave the FDIC on the hook for any losses above $42 billion incurred by Citigroup as a result of taking over Wachovia. The Wells Fargo deal would require no support from the government.
Citigroup's $60-billion damage lawsuit claims that Wells Fargo, which had walked away from the initial FDIC-sponsored talks seeking a suitor for Wachovia, was prohibited from returning with an offer for a week. During that period, an exclusionary agreement prevented Wachovia from discussing a merger with anyone else while it finalized its deal with Citigroup, the suit contends.
It seeks $20 billion in damages -- the amount by which Citigroup's market value fell on news of the Wells Fargo deal Friday -- plus $40 billion in punitive damages against the other banks.
Citigroup's contention is a solid one, said Joe Grundfest, a securities law professor at Stanford University who has followed the case closely.
Wells Fargo has contended that it did not violate the exclusionary agreement because it didn't hold discussions with Wachovia or obtain additional information from it during the blackout period. Wells Fargo Chairman Richard Kovacevich has said Wells merely studied information that Wachovia had previously provided and then returned with an offer.
But Grundfest said the exclusionary agreement was so sweeping that it precluded Wachovia not only from discussing another offer but also from accepting one that was made.
What's more, Grundfest said, undoing the Citigroup deal would undermine the authority of the FDIC just as the bank-insurance and regulatory agency is preparing to deal with the expected failure of many additional banks.
"When you think you have a deal with the FDIC, do you really have a deal? The FDIC needs to do these banking transactions with speed and certainty," Grundfest said. "Litigation leads to delay and risk. And that's not in the FDIC's best interest."
The FDIC issued a statement Friday saying it stood behind the Citigroup deal, although it suggested it might also accept the Wells Fargo transaction after a review by it and other bank regulators.
Unlike the sale of Washington Mutual Inc. to JPMorgan Chase & Co., which involved regulators seizing WaMu and then immediately selling it, the Wachovia sale was considered as occurring in the open market.
At a conference in Washington on Monday, FDIC Chairwoman Sheila Bair expressed hope for a speedy agreement, but added that in such an open market deal the influence of regulators was limited.
"We're all working together to reach an outcome that serves the public interest," she said.