By Dan Wilchins and Elinor Comlay
NEW YORK (Reuters) - Citigroup Inc is eyeing options to bolster its bid for Wachovia Corp including an offer for the entire bank, a person close to the bank said on Monday.
But the person also said Citi had no appetite to buy Wachovia assets without some sort of government guarantee, in sharp contrast with Wells Fargo & Co, which made a $15 billion counter bid for the troubled bank on Friday.
Citi believes its offer for Wachovia's banking assets, priced at $2.2 billion and hinging on a risk-sharing agreement with the U.S. government, has similar value to Wells Fargo's offer for the whole of Wachovia, the person close to the bank said, adding that the bank was disinclined to walk away from the bid.
But Citi shares fell more than 11 percent on worry that it could lose the chance to vastly increase its deposit base through a Wachovia takeover, while Wachovia was down 7.8 percent on concern about the impact of a protracted legal battle.
"The overriding consideration is to get something done and done imminently," said Michael Farr, president of investment manager Farr, Miller & Washington. "A protracted legal squabble is in no one's interest," he added, explaining that the uncertainty over Wachovia's future will likely cause depositors to withdraw their savings from the bank.
Wells Fargo stock fell 3 percent, outperforming the wider KBW Banks index , which was down 6 percent.
At least two brokerages raised their price targets on Wells, saying a Wachovia takeover would expand its footprint in the United States and add to earnings.
But while Wells Fargo's deal also appears to be better than Citi's because it does not depend on government backing, analysts on Monday noted this may not be accurate.
Two analysts cited changes the Internal Revenue Service has made in the tax treatment of losses when a bank is purchased, allowing acquiring banks to recognize tax benefits on loan write-downs at targets as immediate tax benefits, rather than recognizing these benefits over many years.
That could make a Wells Fargo takeover of Wachovia costly to the government in terms of tax revenue.
On Sunday, Citi said it won a court order blocking Wells Fargo from buying Wachovia. That was the first step in a weekend of legal wrangling in state and federal courts as Citi tried to protect its initial agreement.
People familiar with the matter said Sunday that the U.S. Federal Reserve was brokering discussions between Wells and Citi over which bank would buy Wachovia's assets.
The Wall Street Journal reported the Fed was pushing the two banks to compromise by potentially carving up Wachovia between them.
Citi's deal last Monday did not include a signed merger agreement, but Wachovia did sign an agreement to negotiate only with Citigroup through Monday, October 6.
Wells Fargo, the seventh-largest bank by assets, has managed to remain profitable during the credit crunch, while Citi is looking to turn around its ailing business after posting about $60 billion in write-downs and losses during the last year.
(Editing by Maureen Bavdek and Jeffrey Benkoe)
