Wells wins Wachovia – Citigroup Whines (UPDATED)

Citigroup thought it had Wachovia in the bag – a couple of billion and an FDIC backstop seemed quite the rosy deal. Now Wells Fargo has come along and offered $15 billion, without discernible government assistance.

What does Citigroup do about this? Whine like sissies while hiding behind their lawyers.

Citi is a member of the private club in the burbs, and they just got walloped by the scratch player that hangs around the municipal course. It’s not apparent whether Citi had a breakup fee in the deal, but if they didn’t they should fire their lawyers.

If they proceed to court, everyone should ask themselves why Citi couldn’t do something without government guarantees. And whether they want their tax money backing Citi’s thinly veiled turnaround plan.

UPDATE: WFC gets to accelerate use of Wachovia losses. Take it for what it’s worth: on one hand, this means the deal still ostensibly uses government money – on the other hand, it means Wells Fargo expects to have some earnings.

UPDATE 2: Whining works for now – Citi Granted Emergency Injunctive Relief Extending Exclusivity Agreement between Citi and Wachovia.


Vania Shaw says:

Citigroup whining? I highly doubt it.

They have a fabulous tort claim against Wells Fargo for interference with contract and interference with prospective economic advantage. Their lawyers can file a complaint against both Wachovia and Wells Fargo in a state or Federal court sitting in New York City.

The case cannot be moved out of that court (except by way of bankruptcy of Wachovia or Wells Fargo) because the exclusivity contract contained a specific waiver by Wachovia of any right to move it and because Wells Fargo does business in New York. Wells Fargo and Wachovia will have to defend their conduct in front of a jury of New York residents. While New Yorkers hate banks, they hate crackers and Californians even more.

The measure of Citigroup’s tort damages is their economic loss. They lost a cheap purchase price for Wachovia’s branch banking system. Citigroup will be able to use Wells Fargo’s own accounting records to show the book value of the branches to Wells Fargo, based on what Wells Fargo paid for them. On economic loss from the tort alone Wells Fargo is looking at having to pay $2 Billion to $2.5 Billion in damages.

At time of trial, Citigroup will be able to show that Wells Fargo’s employees, including former senior Wachovia employees, interfered with and breached the Citigroup- Wachovia contract for the economic profit of the senior officer employees (who are Wachovia shareholders) and for the economic profit of Wachovia…which by then will have been merged into Wells Fargo. Thus, the prospect for punitive damages over and above the economic damages is very great.

Since Warren Buffet’s company is the largest shareholder in Wells Fargo, there is even some chance that the Oracle of Omaha will be forced to testify for days and days in depositions, as well as at trial if Citigroup’s lawyers find any evidence that Buffet was personally involved in the decision to cut in on Citigroup’s deal. A New York jury is going to have a good time taking money out of the pocket of a billionaire hayseed.

The plaintiffs’ lawyers for Citigroup are licking their chops. This is going to be the best tort claim ever.

Fine legal and strategic analysis. Can’t argue with any of it.

But I’ll try anyway…

The board of Wachovia owes a fiduciary duty to its shareholders under Delaware law – the Court there may have something to say about Wachovia ignoring an unsolicited bid from an entity that seems to have a wherewithal to complete the deal (i.e. Wells doesn’t seem to be as heavily exposed to some of the more egregious paper, like for example Citigroup).

Regardless of the tort, Wachovia’s board cannot simply sign away their duty to shareholders, and $7/share versus $1/share will speak volumes to that.

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