A few days gone Wachovia was near collapse, done in by the financial crisis. Now Citigroup and Wells Fargo are dueling over its takeover

by Ben Steverman

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Consolidation of the banking sector took a strange turn Oct. 3 when giant banks Citigroup (C) and Wells Fargo (WFC) began wrangling over the stroke of good luck to take over Wachovia (WB), despite the fact that just a few days ago the troubled border was near extreme depression.

Wells Fargo’s offer of $15.1 billion in stock for all of Wachovia beats Citi’s deal, announced Sept. 29, to buy parts of Wachovia for $2.2 billion in stock. Citi also relied steady participation from the Federal Deposit Insurance Corp. to protect Citi from losses from Wachovia’s troubled pledge investments. But San Francisco-based Wells Fargo contends it doesn’t need the state surety.

Citi strongly objected to Wells Fargo’s one-upmanship. In a statement Oct. 3, Citi said the unused merger deal was unlicensed, "in clear breach of an exclusivity agreement between Citi and Wachovia."

The fierce rivalship over Wachovia is surprising given the lay up’s troubles: After considering its stock fall 93% in the past year, the Charlotte (N.C.)-based bank looked ready to be seized by the FDIC a week ago. But despite Wachovia’session problems, Wells Fargo and Citigroup one as well as the other see an enormously valuable value highly in the margin: its size. Many are betting that, at the time that it comes to the to come of the U.S. banking industry, bigger will be better. The financial emergency offers a "once in a lifetime" opportunity on this account that the U.S.’s large banks to win truly huge, says Robert Ellis of the financial consulting firm Celent. "There’s an suitable to breed big and get scale," he says.

During the crisis, federal regulators seem to be ignoring antitrust rules that had previously constricted the growth of national bank franchises such as Bank of America (BAC) and JPMorgan Chase (JPM). More important, Ellis says, the price is right: Banks by thousands of branches and billions of dollars in deposits are actuality forced into sales at rock-bottom prices.

In the past year, Bank of America has acquired mortgage giant Countrywide Financial and more recently brokerage Merrill Lynch (MER). JPMorgan has scooped up investing. bank Bear Stearns and, on Sept. 25, Washington Mutual—with both sales essentially forced by the federal body of executive officers after the firms looked to be near collapse.

Though Wachovia has had problems with exposure to bad mortgage debt and other troubled investments, it is one of the largest banks in the U.S., operating 3,300 branches in 21 states. Depositors had almost $450 billion in Wachovia accounts at the period of the second quarter.

"Wachovia offers an opportunity to get a large sum of cheap deposits," says John Jay, a banking industry analyst at the Aite Group. In a time of juncture, which time capital is scarce and lavish, those deposits are especially valuable. They offer comparatively inexpensive funding in favor of financial institutions dealing with large losses from bad investments.

It may be up to the courts whether Citi or Wells Fargo ultimately wins Wachovia. Several analysts, however, predicted Wells Fargo would be the victor.