Ailing Wachovia called focus of bidding war

Citigroup, Wells Fargo are suitors

Citigroup and Wells Fargo were locked in a bidding war yesterday over a possible emergency takeover of Wachovia Corp., people involved in the talks said.

The intense negotiations come as concern grew about Wachovia's stability on Friday, the people said, despite a breakthrough reached yesterday by congressional negotiators on a $700 billion bailout for the financial system.

The government has been involved in the talks as well, these people said. But so far, the government is resisting pressure to help bidders by guaranteeing a part of Wachovia's assets the way it did for Bear Stearns when it was sold to JPMorgan Chase in March.

The government has also opposed taking over Wachovia the way it did Washington Mutual last week, these people said, unless its financial position deteriorates more rapidly.

A timetable for a potential deal was not clear.

Either way, Citigroup and Wells Fargo are unlikely to bid more than a few dollars a share for Wachovia, substantially less than the $10 at which its shares were trading Friday.

It was unclear whether bondholders would also take a steep discount on their holdings, or be entirely wiped out.

Other aspects of the deal also remain in flux. One is whether all of Wachovia is up for sale, or whether the company might be carved up.

Citigroup and Wells Fargo, for example, might bid only on Wachovia's retail banking business. Wachovia retail brokerage, the second-largest behind Merrill Lynch, might remain independent. It was unclear what would happen to Wachovia's small investment bank.

Both Citigroup and Wells Fargo are interested in acquiring Wachovia's branches and roughly $400 billion in deposit financing.

For Wells Fargo, a deal would extend their branch banking network eastward across the Mississippi.

For Citigroup, the deal would vastly expand its retail branch network after struggling to build one for years.

It would also give it access to more stable customer deposits, so it could rely less heavily on outside investors for funds. Bank executives there see this as game-changing opportunity.

Still, both Citigroup and Wells Fargo have serious concerns about taking on Wachovia's $800 billion loan portfolio. In particular, they are worried about a big swath of troubled mortgages tied to the 2006 acquisition of Golden West, a California lender that specialized in pay-option mortgages.

Citigroup and Wachovia declined to comment. Wells Fargo did not immediately return calls seeking comment.