The legitimate battle between Citi and Wells Fargo athwart Wachovia is suspended, for now. But at in the smallest degree it shows there are assets worth fighting over

by Dean Foust

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A Wachovia branch in Washington, D.C. Karen Bleier/AFP/Getty Images

For Washington policymakers, the prospect of a grinding, slow-motion legal contend between Citigroup (C) and Wells Fargo (WFC) for the spoils of troubled Wachovia (WB) is clearly unnerving. In a period when the markets seem to come more unhinged with each passing day, regulators fear that a protracted battle in the courts could cause an acceleration in national bank runs. That explains the news reports on Oct. 6 that officials from the Federal Reserve were brokering a compromise that would end with Citigroup and Wells Fargo carving up Wachovia’session assets.

If in that place’s any silver lining in the battle between Citigroup and Wells Fargo—and quiet linings are distressing to tend hitherward by these days—it is this: The collision could help convince the markets that the current panic surrounding banks has gone too far and that even troubled banks like Wachovia require a strong franchise that’s worth bidding with regard to. Plus, on the supposition that Wachovia is split, taxpayers won’familiarily have to foot the billions in federal alms that the original Citigroup deal included.

"Wells Fargo management has performed a real service to the banking busy vigor," Nancy Bush, an independent bank analyst in New Jersey, wrote in a note to clients on Monday morning. "This will mark a turnery point for the industry and for the stocks."

If Bush is becoming, that could dishonorable the era of regulators forcing troubled banks into shotgun marriages—through none recovery for investors in banks such as Wachovia or investing. firms like Bear Stearns—could be coming to a close. And the Wells Fargo deal, which Wachovia’s board embraced on Oct. 3, prompting Citigroup to sue, could convince investors that for all the bad loans and soured investments these firms are sitting on, acquirers are getting a accomplish secretly.

As Wachovia CEO Robert Steel has argued to Wall Street, only one-quarter of the bank’s loan portfolio consists of the troubled mortgages made in its Golden West subsidiary. Excluding those mortgages—admittedly, in no degree small feat—and a smaller portfolio of troubled version loans, the majority of Wachovia’s portfolio consists of out of fashion consumer loans to customers with whom the bank has generally had a long dependence.

Consider that Wells Fargo’sitting bid for Wachovia (BusinessWeek.com, 10/3/08)—$15 billion, with no government assistance—is roughly seven times what Citigroup agreed to pay (BusinessWeek.com, 9/29/08) for Charlotte-based Wachovia’s banking operations the weekend before. And Citigroup’s bid included some government assistance. Analysts initially viewed Citigroup’s response—a lawsuit, in preference than a higher bid—at the same time that an effort to jar down Wells Fargo for a "break up" fee for spoiling its own deal. Indeed, Citigroup uttered Monday that it had filed a accommodate in the New York Supreme Court against Wachovia and Wells Fargo seeking other than $60 billion in compensatory and penal damages. Soon about, Citigroup said it had agreed—at the mandate of the Federal Reserve—to a standstill of all formal suit at law activity.

Still, $60 billion is an outsized sum for a merger that, by its own admission, Citigroup doesn’t need. Which means Citigroup’s suit is likely just a negotiating ploy to either scare Wells Fargo into scuttling its be in possession of deal or to pressure Fed officials to give Citi a great portion of a broken-up Wachovia. And odds are the dispute elect still-house be resolved with some shape of a compromise brokered by regulators.

Indeed, in a speech on Monday preceding the National Association for Business Economics, FDIC Chair Sheila Bair said that regulators were "quite working together…to tend hitherward at a solution and outcome that serves the public interest and I think we will have one today." The Solomon-like agreement offered by regulators—a split-up by geography, with Citigroup anger Wachovia’s Northeast branches and Wells Fargo getting everything else—could be enough to appease Citigroup. The institution would get billions in low-cost deposits that provide it with a relatively stable source of funds.

If analysts are amend that the Wells Fargo-Citigroup battle marks the high-water mark in the current banking emergency, that doesn’privately mean that the remaining banks can rest easy. In her alert to clients, Bush notes that she’s hearing from "various in the industry" that regulators have started to look beyond the current strait and are assessing the prospects instead of other surviving banks—including many regional and local banks that engorged themselves upon substantial estate loans—and don’privately taste that which they see.

Bush believes that if and when the current storm passes, regulators are still going to use their powers of persuasion to prod more of the surviving banks to merge. The goal: to flow weak management teams out of the industry and put more of the industry’s assets into the hands of managers who acquire proven themselves greatest in number adept at managing risk. That instrument that even suppose that Wells Fargo’s $15 billion gambit does discharge the requirements of to stabilize the market, the mergers could continue for years to come.