Citigroup abandons Wachovia takeover and leaves Wells Fargo to take control

Citigroup abandoned its government-backed takeover of rival US bank Wachovia last night, ceding control of the tottering institution to Wells Fargo, a smaller bank which made a private bid for the company late last week.

The two suitors had been locked in talks aimed at carving up Wachovia between them, but Citigroup said they were too far apart to reach a deal.

The government-sponsored Federal Deposit Insurance Corp had brokered a deal to sell Wachovia's banking operations at the start of last week, in a dramatic move aimed at preventing a run on the ailing bank. Citigroup was going to pay $2.1bn for the business, with government guarantees to limit its losses on Wachovia's mortgage exposures.

Wells Fargo has offered $15.1bn for the whole company, which included a broking business, without government assistance.

Citigroup said last night that the "dramatic differences in the parties' transaction structures and their views of the risks involved made it impossible to reach a mutually acceptable agreement". It said it believed it had strong claims for compensation over its broken marriage, but said it would not use its $60bn legal action to block the Wells Fargo deal.

Analysts have hailed the tussle over Wachovia as evidence that there is at least some value in parts of the battered US banking system, and Wachovia shares last night snapped back higher in after-hours trading. It had, however, been a brutal day for many bank stocks, amid fears that shareholders could end up being heavily diluted if the federal government adopts a UK-style plan to inject capital directly into ailing companies.

Such a part-nationalisation plan has been moving up the policy agenda, the White House spokesman signalled yesterday – a day after Hank Paulson, the Treasury secretary, said the recent $700bn (£410bn) bailout legislation, now passed into law, contained all the tools necessary for the administration to take any action it deemed necessary.

Mr Paulson said: "It is the policy of the federal government to use all res-ources at its disposal to make our fin-ancial system stronger. We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalisation of financial institutions of every size."

Mr Paulson is also convening a special meeting of the G20, comprised of the world's 20 largest economies including China, Russia, Australia and Saudi Arabia in Washington this weekend, a wider gathering than the G7 summit that was already scheduled.