The stay that Citi obtained on Saturday afternoon from the New York supreme court, restraining Wachovia from going ahead with the competing bid from Wells Fargo, was overturned by a New York state appeals court last night as Wachovia obtained a restraining order preventing Citi from interfering with its deal to sell the entire company to Wells Fargo.

Citi had offered to acquire the banking business of Wachovia for $1 per share against the Wells Fargo offer of $7 per share for the whole enterprise (See: Citi to acquire Wachovia assets in a US government-backed rescue) 

Citigroup had accused Wells Fargo of interfering with its acquisition by doing a backdoor deal to acquire Wachovia for more than $16 billion just four days after Citi struck a deal to acquire Wachovia's banking operations for a little over $2 billion last Monday, a deal brokered and backed by the US government. It had asked for $60-billion damages from Wells Fargo for interfering with its original acquisition (See: Citi seeks $60-billion damages from Wells Fargo).

Wells Fargo and Wachovia rushed to the state appellate court to get the stay obtained by Citi overruled but the US district court judge refused to pass an order till both sides presented their case on Monday.

Wachovia then sought state appeals court intervention on Sunday night where Judge James McGuire overruled the previous order by Judge Ramos at his Cornwall residence, saying, "I believe substantial questions have been raised regarding the authority of Justice Ramos to have issued the order while physically located outside the state of New York.''

Wachovia had pointed out that the ''exclusivity agreement'' that it had signed with Citi, had no bearing on the Wells Fargo offer, as the $700-billion bailout planpassed by the US Congress, states that such exclusivity agreements are not tenable by law as they hamper the merger of banks.
Citi has said that it will appeal the ruling as the language used in the bailout plan regarding this is debatable.

According to a report in The Wall Street Journal, this clause was inserted at the last minute on the request of the Federal Deposit Insurance corporation (FDIC), which had wanted the Wells Fargo deal to go through as the ''exclusivity agreement'' would have restrained Wachovia from accepting other offers. This was despite the FDIC having brokered the original Citi-Wachovia deal.

Wachovia's CEO Robert Steel had filed a 57-page sworn affidavit before the federal court over the weekend stating that his bank was in the midst of two rival takeover bids as FDIC had pressured it to sell itself. The affidavit further hints that it was the FDIC, which who had instigated Wachovia to close the Wells Fargo deal although it had brokered the Citi-Wachovia deal just a few days before.

This was done basically to ensure that the government did not suffer any losses from the Citi deal, if any, in the future.

Incidentally Robert Steel, the CEO of Wachovia, was a senior US Treasury official and is a close friend of Henry Paulson, the architect of the $700 billion bailout plan. He was appointed CEO to prop up Wachovia and within two weeks of his arrival, bought 1 million shares of Wachovia stock for about $16 million, the The Wall Street Journal reported.

Wells Fargo said in a statement, ''We are pleased that the unfounded order entered yesterday has been vacated, Wells Fargo will continue working toward the completion of its firm, binding merger agreement with Wachovia Corporation.''

Wachovia said that it ''continues to believe its agreement with Wells Fargo, which involves no government assistance, is proper and valid.''

As the battle for Wachovia escalates and being fought bitterly in the courts, the US Federal Reserve and the Treasury Department have sought to intervene and broker a deal between Citi and Wells Fargo.

According to the WSJ report, US regulators have offered a compromise solution where Wachovia's network of 3,346 branches will be divided along geographic lines  with Citi getting Wachovia's branches in the Northeast and mid-Atlantic regions and Wells Fargo in the Southeast and California along with its asset-management and brokerage units.

This compromise will not involve a financial backing from the government as in the case of the Citi-Wachovia deal where the FDIC entered into a loss-sharing arrangement for Wachovia's toxic assets on a pre-identified pool of loans with Citi.

These talks were conducted with Citi and Wells Fargo officials only and Wachovia was not included in the talks even though Wachovia's shareholders will have to approve of any deal, the WSJ said.

Simultaneously, as these talks proceeded, the lawyers of both banks slugged it out in the courts.