Battle for Wachovia tilts toward Wells Fargo

“Nothing in the court’s temporary order impacts our ability to ultimately do that.”

The FDIC said Friday it “stands behind its previously announced agreement with Citigroup.” It also said it would review all proposals and work with regulators of all three institutions to resolve the tug-of-war. An FDIC spokesman did not immediately return calls for comment on Sunday.

The legal fight pits two of the largest remaining financial institutions against one another as the ongoing credit crisis leads the federal government to arrange marriages and sales among banking entities.

But not only does a legal battle delay Wachovia’s saving, it could also be damaging to Citigroup, Halliburton said.

“I’m quite surprised that Citigroup would be agitating in this fashion, given that they themselves might need some government favors in the near future,” Halliburton said, either for recapitalization or potentially to take over some other failed institution with the help of the FDIC.

“I can see why Citigroup wants it. I’m just surprised they don’t recognize in all likelihood it’s over.”

Wachovia was a big originator of what are called option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months.

Wachovia and Citigroup are among the companies that have been forced to take billions of dollars in write-downs because of failed mortgages and mortgage-backed securities that have also plunged in value. The heavy losses led to the failure not only of WaMu and a number of smaller banks, but also the government-brokered sale of Bear Stearns Cos. to JPMorgan Chase & Co. and the bankruptcy filing of Lehman Brothers Holdings Inc.

Despite its escalating loan losses, Wachovia is still worth far more than either Citigroup or Wells Fargo is offering, said Herb Sandler, the former co-chief executive of Golden West Financial Corp. Wachovia picked up about $122 billion in option ARMs when it bought Golden West and its thrift, World Savings in 2006 for $24.3 billion.

Arguing the projected losses on the World Savings loan portfolio have been grossly exaggerated, Sandler believes Wachovia is still worth at least $60 billion. “This is still a viable company,” said Sandler, who declined to disclose how many shares he still owns in Wachovia. He and his wife received Wachovia stock worth more than $2 billion at the time the deal closed.

New York-based Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That’s the most write-downs of any U.S. bank.

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