Wells Fargo, Citigroup in tug of war over Wachovia

— -- Wachovia wb and Citigroup c lawyers spent the weekend in state and federal courts, sparring about Wachovia's decision Friday to break off its engagement with Citigroup after getting a better offer from Wells Fargo.

Wachovia agreed on Friday to sell itself to Wells Fargowfc for stock valued at about $15 billion. It had accepted an offer four days earlier from Citigroup to buy its retail bank, corporate and investment bank, and wealth management businesses — but not its brokerage or asset management firm — for just over $2 billion.

Better deal or not, Citigroup says Wachovia violated the terms of its deal by entering into one with Wells Fargo, and filed a lawsuit a block it. Citigroup says Wachovia had agreed it would "not participate in any discussions or negotiations with any third party" and that Citigroup would be "irreparably harmed" by a breach of that agreement.

In response to a lawsuit filed by Citigroup, a New York judge on Saturday temporarily blocked the sale of Wachovia to Wells Fargo, but Sunday, a state appellate court threw out that ruling. Sunday, Wachovia filed a lawsuit asking a federal judge to declare its agreement with Wells Fargo valid. U.S. District Judge John Koeltl denied that request but set a hearing for Tuesday on whether the letter agreement that Citigroup says precludes the Wells Fargo bid is enforceable.

Citigroup says it "is prepared to resume negotiating in good faith," noting that it has provided "liquidity support" to Wachovia since last Monday.

Wachovia said Sunday that it doesn't believe the Saturday order has any effect on the validity of its deal with Wells Fargo, adding "Citigroup is always free to make a superior offer."

A Wachovia-Wells Fargo deal would create a powerhouse, with 10,761 sites in 39 states, 48 million customers, $787 billion in deposits and $1.42 trillion in assets. It would leap past JPMorgan Chase and Bank of America to be No. 1 in domestic branches and deposits.

"The agreement is in the best interests of shareholders, employees, creditors and retirees, as well as the American taxpayers, and it imposes no risk to the FDIC fund," Wachovia said Sunday.

The Federal Deposit Insurance Corp. had agreed to protect Citigroup from some losses related to $312 billion in Wachovia's mortgage-related assets.

But Wells Fargo is taking advantage of new IRS guidance issued last week that allows companies to use certain losses from companies they acquire to offset profits after the merger. Normally, complex rules limit the ability of the buying company to use those losses to offset income and reduce its tax burden, says CPA and tax specialist Barbara Lipson.

That means it's still "not a free ride for the American public," says Lipson, with the McLean, Va., public accounting firm Frank & Co. "It's still costing taxpayers in the reduction of tax revenue. If revenue doesn't come from one source, it's got to come from another."

Despite the new challenges, for Wachovia, "it seems like the legal risk of a potential lawsuit is offset by the better terms from Wells," says Keefe Bruyette and Woods analyst Jefferson Harralson.