To recap the simple facts:
(1) Sunday September 28th Wells Fargo blew up its deal to purchase Wachovia, which had been negotiated with the help of the FDIC.
(2) Later that day, Sunday September 28th, and continuing on into the wee hours of Monday September 29th, FDIC held Wachovia's feet to the fire, telling them that FDIC would seize them and shut them down on September 29th unless they agreed to have their banking operations, at least, purchased by Citigroup which had been the "also ran" until Wells Fargo bailed out of the Wachovia purchase deal.
(3) On Monday September 29th Wachovia signed, for Citigroup's benefit, a binding contract called an "Exclusivity Agreement" which said, in short summary, Wachovia would not negotiate with any other bank or third party for the purchase of Wachovia's assets, until after Monday October 6, 2008. In the Exclusivity Agreement, Wachovia contracted away any right to have any law other than the laws of the State of New York govern the interpretation and enforcement of the contract. In addition, Wachovia contracted away any right to have any court, other than a Federal court sitting in New York, hear any lawsuit arising out of the contract. The terms of the Exclusivity Agreement were binding on the Wachovia parent company, its subsidiaries and its officers and directors.
(4) On Monday September 29th Wachovia signed, for Citigroup's benefit, an outline of deal terms under which Citigroup would purchase Wachovia's banking assets. Citigroup, in turn, provided loans to Wachovia to keep it afloat until the definitive sale agreement for those assets could be completed and the sale deal closed. FDIC relied on that deal term sheet and the loans from Citigroup to Wachovia and FDIC did not seize or close Wachovia during the week of September 29th.
(5) In connection with the Exclusivity Agreement and the term sheet, FDIC entered into a contract with Citigroup which would provide economic support from the FDIC to Citigroup in terms of guarantees that FDIC would bear losses from Wachovia's bank assets after those losses surpassed a certain dollar breaker number. Citigroup was to pay FDIC for that guarantee upon the closing of the sale of the Wachovia bank assets to Citigroup.
(6) Between Monday September 29th and Thursday October 2nd, Citigroup and Wachovia made substantial progress in negotiating and drafting the contract under which Wachovia's bank assets would be sold to Citigroup. Because FDIC had not seized Wachovia, arguably that sale would have required the consent of Wachovia's shareholders.
(7) In a clear violation of the Exclusivity Agreement, at the same time as they negotiated with Citigroup, Wachovia's officers secretly negotiated with Wells Fargo, creating a Merger Agreement under which Wells Fargo would buy the entirety of Wachovia. Wachovia's Board of Directors, some of whom reside in New York, approved that Merger Agreement and officer(s) of Wachovia signed it. As a result of the negotiations, let alone the signing of the merger agreement, Wachovia breached its contract with Citigroup, i.e. the Exclusivity Agreement. As a result, Citigroup gained the right to file a lawsuit against the Wachovia corporate entity for breach of contract, the contract being the Exclusivity Agreement. In addition, as a result of the Wachovia Directors' vote to approve the Wells Fargo merger agreement, Citigroup gained the right to file a lawsuit against Wachovia's Directors, both for breach of contract (the Exclusivity Agreement) and for tortious interference with contract (the Exclusivity Agreement).
(Cool In a variety of interviews for print press and on television, Wells Fargo's chairman admitted that Wells Fargo had known of the terms of the Exclusivity Agreement, but nevertheless contacted Wachovia's officers, and offered the Merger Agreement before the expiration of the Exclusivity Agreement on October 6th. As a consequence, Wells Fargo committed the tort of interfering with the performance by Wachovia of its contract with Citigroup, i.e. the Exclusivity Agreement. Wells Fargo has offices in New York, and acted through its New York lawyers in entering into the Merger Agreement with Wachovia.
(9) On Thursday September 2nd, Congress passed the bail out legislation called TARP. Among the provisions buried in TARP were two statutory provisions relevant to Wachovia.
(10) One provision in TARP made it unlawful for any third party to interfere with the implementation of any contract made by FDIC in furtherance of a rescue of a banking institution. The agreement described in Paragraph 5 above is that sort of agreement. Citigroup would later argue that provision of TARP made Wells Fargo's conduct all the more wrongful. The problem with application of that provision of TARP to Wells Fargo's conduct is that the conduct occurred before TARP became law, and a general provision of statutory interpretation makes retroactive application of laws regulating conduct unlikely to be enforced.
(11) Another provision in TARP seeks to invalidate any contract which is an impediment to the recapitalization of an FDIC insured institution through the efforts of the FDIC. The example given prior to the enactment of TARP was TPG group's contract with Washingtom Mutual, entered into when TPG injected more than $1 Billion into WaMu earlier this year, well prior to FDIC's seizure by the FDIC. The TPG-WaMu contract had said that if WaMu brought in another capital injection, or sought additional loan financing, that TPG would be paid its preferred stock dividents prior to or contemporaneously with any repayment of the new capital contribution or financing. It was said that that provision for the benefit of TPG in reality prevented any "saving" of WaMu as an independent bank, because no new money would come in if TPG got paid first. Again, the provision of TARP at issue was to prohibit the type of contract which had benefitted TPG to the ultimate detriment of WaMu. Once TARP was enacted, Wachovia and Wells Fargo then argued that the provision of TARP discussed in this paragraph 11 retroactively invalidated the Exclusivity Agreement which had been signed by Wachovia's officers for the benefit of Citigroup during the last minute FDIC sponsored negotiations on the morning of September 29th. Citigroup in turn said that there are 200 year old principles of law, prohibiting the Congressional impairment of pre-existing contracts as a taking of property without due process as a violation of the Fifth amendment, and other 200 year old principles of law preventing retroactive application of statutes rendering conduct unlawful. Citigroup would say those principles of law would make TARP inapplicable to the Exclusivity Agreement. [Some internet commentators have said that disputed provision was inserted into TARP some time between Monday September 30th and Thursday September 2nd, specifically to undo the FDIC/Citigroup agreement concerning Wachovia. Only time will tell if that is true.]
(12) On Saturday, October 5th, Citigroup went to New York State Supreme Court Justice Charles Ramos (the "State Court Judge") with an unfiled complaint against Wachovia for breach of contract, i.e. the Exclusivity Agreement, against Wells Fargo for tortious interference with contract, and against the individual members of the Boards of Directors of Wachovia and Wells Fargo for tortious interference with contract. The complaint is not available on the internet. However, after several hours of oral argument, by Citigroup's attorney and Wells Fargo's attorney in person, and by Wachovia's attorney over the telephone, the State Court Judge issued an Order to Show Cause which was posted on the internet by the New York Times. In the OSC the State Court Judge ordered that all of the Defendants show cause on Friday October 10th why the State Court should not enjoin Wachovia and any person working in concert with them (i.e. Wells Fargo, the Wachovia and Wells Fargo officers and directors who are Defendants) from negotiating or closing any transaction involving the acquisition or merger of Wachovia. The State Court Judge's order also indefinitely extended the expiration of the Exclusivity Agreement.
(13) Several major news sources mistakenly reported that the State Court Judge had enjoined the merger of Wachovia into Wells Fargo. He did not. Instead, in the Order to Show Cause, to be heard on Friday October 10th, Wachovia and Wells Fargo were ordered to show cause why he should not issue a preliminary injunction enjoining the merger then, October 10th.
(14) The Associated Press reported that after the State Court Judge issued his order Citigroup said in a statement announcing the ruling that Citigroup "is prepared to continue negotiations with Wachovia on the parties' previously agreed-to transaction."
(15) On Sunday October 5th Wachovia and Wells Fargo responded by taking a complaint for declaratory relief to U.S. District Judge John Koeltl (the "Federal Court Judge") and asking him to issue an emergency order granting some sort of relief. Neither the Federal court order nor the Federal Court Judge's emergency order are available on the internet at this point.
(16) The AP's Sara Lepro, an AP Business Writer, reports that "Wachovia ask[ed] Judge Koeltl to declare that the Wachovia-Wells Fargo agreement "is valid, proper and not prohibited by a letter agreement between Wachovia and Citigroup." Bloomberg's Patricia Hurtado reported: "[The] judge refused to rule immediately that Wells Fargo & Co.'s takeover bid for Wachovia Corp. is valid, while saying it ``appears'' the law permits Wachovia to consider offers other a prior one from Citigroup Inc. At the emergency hearing today, [Sunday,] David Boies, a lawyer for Wachovia, asked U.S. District Judge John Koeltl to rule that Wells Fargo may proceed with its $15 billion proposal. Koeltl declined and scheduled a hearing for Oct. 7 at which another judge will be asked to determine whether the offer may proceed.
(17) AP's Sara Lepro also reports that Wachovia and Wells Fargo are claiming in their Federal Court complaint that TARP prevents enforcement of the Exclusivity Agreement, probably in the manner described in paragraph 11 above. Citigroup apparently disagrees with that analysis of TARP for the reasons described in Paragraph 11. Bloomberg's Patricia Hurtado reported: "At today's hearing in federal court, [Wachovia's lawyer David] Boies said the U.S. bailout law, the Emergency Economic Stabilization Act, permits Wachovia, which faced a federal takeover before the Citigroup offer, to entertain superior bids. He also said that under state law, Wachovia shareholders have a legal duty to consider superior offers. ``We are entitled as a matter of law to a judgment that Wachovia is permitted to go forward with Wells Fargo,'' Boies told the Federal Court Judge Koeltl. ``This is a matter of considerable urgency.'' Citigroup's attorney, General Counsel Michael Helfer, said Boies is reading the bailout law ``exactly backwards'' and that the provision at issue, Section 126(c), ``was designed to protect FDIC-guaranteed deals.'' He also said that state law bars Wachovia from entering the Wells Fargo deal after reaching one with Citigroup. ``When they signed an agreement, it does not permit them to accept another offer,'' he said."
(1Cool In their appearance before the Federal Court Judge Wachovia and Wells Fargo apparently argued that a Federal law question has arisen over the meaning of the disputed provision in TARP and that the case filed in New York Supreme Court should be transferred ("removed") to Federal Court and consolidated with Wachovia and Wells Fargo's case seeking interpretation of the provision in TARP.
(19) According to AP's Sara Lepro "It was clear from documents filed in federal court Sunday that Wachovia was in considerable trouble when it agreed to the deal. Wachovia disclosed that it agreed to the deal "with the understanding that a seizure of its banking assets later that day by the Federal Deposit Insurance Corp. would occur" unless it accepted Citigroup's proposal."
(20) According to AP's Sara Lepro, but not verified through the posting of the Federal Judge's order, the Federal Court Judge has set a hearing for Tuesday October 7th in which Citigroup can make its case concerning the inapplicability of TARP to the Exclusivity Agreement. That reporting was confirmed by Bloomberg's Patricia Hurtado who reported: ``We are very pleased that Wachovia's motions for emergency injunctive relief and a temporary restraining order were denied today in federal court,'' Citigroup spokeswoman Shannon Bell said."
(21) Also according to AP's Sara Lepro, but not verified through the posting of the Federal Judge's order, the Federal Court Judge has "temporarily blocked" the State Court Judge's order that Wachovia and Wells Fargo show cause in state court on Friday September 10th as to why the State Court Judge should not enjoin the merger of Wachovia into Wells Fargo.
(22) AP's Sara Lepro also reported that "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."
(23) Other press sources say that Citigroup announced that intends to pursue Wells Fargo on its interference with contract tort claim even if the merger does occur, and that Citigroup will seek $60 Million in damages. Bloomberg's Patricia Hurtado confirmed the likelihood of continued state court litigation with a comment from Wells Fargo's lawyer: "The state case will go forward on ``parallel tracks'' with the federal case, according to Wells Fargo lawyer Eric Seiler. One issue in the state case remains whether Wachovia breached the exclusivity agreement with Citigroup when it entered into talks with Wells Fargo." If Wachovia is merged into Wells Fargo, Wells Fargo will be liable for both a breach of contract damage award against Wachovia and a tort damage award against Wells Fargo.
(24) Bloomberg's Patricia Hurtado also reported that: "After the federal hearing, New York State Appellate Division Judge James McGuire tossed out [the State Court Judge's] ruling. Citigroup lawyer Paul Bschorr said the bank would appeal McGuire's decision to the full court tomorrow." Hurtado also reported that Judge McGuire invalidated the State Court Judge's ruling because it had been issued at the judge's weekend home in Connecticut, and not in New York.
(25) Sunday night, the Wall Street Journal's David Enrich was reporting: "Under pressure from the federal government, Citigroup Inc. and Wells Fargo & Co. were locked in negotiations Sunday night aimed at trying to defuse the battle for Wachovia Corp., according to people familiar with the situation. In a sign that U.S. officials are concerned about the increasingly volatile situation, officials from the Federal Reserve were pushing hard for Citigroup and Wells Fargo to reach a compromise. That effort could result in essentially carving up the Charlotte, N.C., bank between its two suitors, these people said. Under the leading plan being discussed Sunday night, Citigroup and Wells Fargo would divvy up Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California, according to people familiar with the talks. Wells Fargo would take over Wachovia's asset-management and brokerage units."
Prediction: If a settlement between Citigroup and Wachovia is not quickly reached by close of business on October 6, 2008, in order to avoid any instability in the banking system caused by the litigation battle between Citigroup and Wells Fargo, and the possibility of appeals of emergency trial court rulings, the FDIC will seize Wachovia and hold an auction for the sale of the entirety of Wachovia, thereby eliminating any risk of a New York or Federal court judge enjoining the Wachovia into Wells Fargo merger. Such an FDIC conducted sale would leave only the litigation between Citigroup, Wells Fargo and Wachovia over damages for alleged breaches of contract and tortious interference with contract. Permalink