Wells Power Play Puts Citigroup, FDIC On Defense

(MoneyWatch)  Which do you prefer -- a bank merger requiring government assistance or one that does not?

That's the big question revolving around today's surprise announcement that Wells Fargo has entered a deal to acquire Wachovia for nearly $15 billion in stock. This agreement seeks to supplant Citigroup's previously announced deal to acquire Wachovia for much less, $2.16 billion. As part of that transaction, the Federal Deposit Insurance Corp. has essentially agreed to cap Citigroup's exposure to questionable Wachovia assets to $42 billion.

Wells, which has side-stepped the subprime morass pulling down other giant lenders, would be taking on significant risk if it succeeds in acquiring Wachovia, which may have hundreds of billions of risky loans on its books. Wells, which will seek nearly $20 billion in new investor capital for this deal, also expects to pay up to $10 billion in merger-related charges.

Right now, however, Wells CEO Richard Kovacevich isn't overly-concerned about such possible pitfalls. He contends his bank can isolate and work out any troubled loans uncovered after the Wachovia purchase.More important to Kovacevich, Wells will be able to greatly expand its retail banking network nationwide. By acquiring Wachovia's stronghold of East Coast bank branches, Wells stays competitive with the growing JP Morgan Chase and Bank of America, which have each recently made distressed bank buys.

The deal also gives Wells a foray into investment banking services and puts it in direct competition with Chase, BofA and Citigroup.

For Citigroup, buying Wachovia is essential to remaining an upper-tier retail banking power. Wachovia gives New York-based Citigroup a large West Coast presence, while supplementing its number of bank branches along the southern Atlantic coast.

Although Citigroup is now preoccupied with a massive internal restructuring, the Wachovia deal was too good to pass up, especially with the FDIC back-stopping its loan writedowns.

Right now, the FDIC and Citigroup argue their Wachovia deal is done. But, that's not likely to be the final word.

Wells is playing a strong hand: It's deal offers Wachovia shareholders a higher price and the public is not at risk because Wells isn't asking for the federally-backed FDIC to assist in making the transaction.

Considering that taxpayers are being asked to promise up to $700 billion for the pending economic recovery bill now before Congress, the FDIC may have to back off its initial support of the Citigroup deal or help broker some type of compromise that allows Wachovia to be sold in pieces to Wells and Citigroup.