Wachovia in Early Deal Talks with Citigroup, Others

Chuck Burton

A Wachovia branch bank is shown in a Charlotte, N.C. file photo from July 20, 2006. After a rough year, the banking industry appears headed for another in 2007. (AP Photo/Chuck Burton, File)

Wachovia has begun preliminary talks with Citigroup about a potential merger, people briefed on the matter said Friday.

Feelers have also been extended between Wachovia and Wells Fargo and Spain’s Banco Santander, these people said.

These talks are early, however, and no deal may emerge from them, these people said.

Wachovia , the big bank headquartered in Charlotte, has been under increasing pressure in recent weeks amid the turmoil gripping the banking sector. It took additional fire on Friday after JPMorgan Chase acquired virtually all of Washington Mutual, until Thursday evening the nation’s largest savings and loan, in a government-brokered sale.

A Wachovia spokeswoman declined to comment.

If a deal were to happen, Citigroup would gain one of the sterling names in retail banking. Wachovia would give the banking giant a heightened presence along the Eastern seaboard, and Citi would also gain Wachovia’s retail banking management team, considered one of the strongest in the business.

Shares in Wachovia have plummeted 78 percent over the past year amid questions about the firm’s biggest burden: billions of dollars in option adjustable-rate mortgages it acquired from its purchase of Golden West Financial. According to CreditSights, a research firm, Wachovia holds about $120 billion of these mortgages, which are considered especially risky because borrowers have the option of skipping part of their payments and adding that debt to the principal of the loan.

Wachovia’s stock fell about 38 percent by Friday afternoon, as investors seemed especially worried about the value of those mortgages. JPMorgan on Friday said that it will significantly write down the value of similar mortgages held by Washington Mutual, raising questions of potentially bigger write-downs at Wachovia.

A week and a half ago, Wachovia began deal talks with Morgan Stanley, negotiations set against the backdrop of Lehman Brothers’s collapse. But nothing has resulted from those discussions.