Conflict ignited Friday over Wachovia Corp. after the bank announced a deal to sell itself to Wells Fargo & Co. for $15 billion despite a pact it had agreed to in principle with Citigroup Inc. earlier in the week.

But Citigroup said any transaction between Wachovia and Wells Fargo would be in "clear breach" of an exclusivity agreement it had signed with Wachovia. Citigroup may take legal action against the banks or may increase its offer, according to published reports.

"Citi has demanded that Wachovia and Wells Fargo terminate and not proceed with any proposed transaction, any conduct in furtherance thereof, or any other act in violation of the exclusivity agreement," Citigroup said in a statement. "Citi has substantial legal rights regarding Wachovia and this transaction."

A deal between Wachovia and Wells Fargo might be better for the municipal sector. Wells Fargo would keep the company intact, whereas Citigroup's would buy the banking operations - including the investment bank - and leave retail brokerage Wachovia Securities LLC and asset manager Evergeen Investments behind. Wells Fargo executives pointed to the retail brokerage's distribution network as one of the positives in the deals.

Given Wells Fargo Brokerage's smaller presence in the public finance sector, the two firms also have limited overlap. Nationally, Wachovia Securities this year has acted as senior manager on 296 issues with a net par value of $9.2 billion compared to Wells Fargo's 110 issues with a net par of $1.4 billion, according Thomson Reuters data.

Wachovia was busier than Wells Fargo in every region except the Far West this year, and Wells Fargo's only other significant work as senior manager took place in the Midwest, ranking 29th or lower in all other regions.

Both firms have recently reiterated their commitments to public finance. Wachovia last month announced it had hired 11 bankers as it sought to expand in the Northeast and Florida. Following a recent hire in Texas, Wells Fargo echoed comments it had made the past few years that it plans to double its public finance business by 2010.

Outside of underwriting, Wells Fargo Bank ranks third as a bond trustee, serving on 476 issues with a par value of $30.97 billion through last Thursday, according to Thomson Reuters data. Wachovia Bank ranks fourth as a letter of credit provider, working on 79 deals with a par value of $3.9 billion this year.

Although a smaller player in the past, Wells Fargo Bank ranks sixth as a LOC provider this year, wrapping 57 issues with a par value of $2.5 billion. It has triple-A rating from Standard & Poor's and Moody's Investors Service.

Standard & Poor's yesterday put Wells Fargo & Co.'s AA-plus rating on CreditWatch negative. It moved Wachovia Corp.'s BBB-minus rating to CreditWatch developing from CreditWatch negative.

Standard & Poor's said it would raise its ratings on Wachovia to Wells Fargo's level if the deal closes. Municipal issuers would benefit from that move, market participants said.

"We think this is great," said Robert Lamb, president of Lamont Financial Services Corp. said. "We have clients that have swap contracts with Wachovia and they're going to be facing a better rated counterparty when the merger is over."

Under the deal announced Friday, Wells Fargo would acquire all of Wachovia in the transaction - valued at $7 per share - and assume all its preferred stock and debt. In the earlier deal, Citi agreed to purchase just the banking operations of Wachovia in a $2 per share deal that came with government support.

The Federal Deposit Insurance Corp. "stands behind its previous announced agreement with Citigroup," it said in a statement. It will work with the banks and their regulators to come to a resolution "that serves the public interest," it said.

The Federal Reserve and the Office of the Comptroller of Currency said it had performed an "extensive review" of the Citigroup deal, but not the Wells Fargo proposal and "the issues and it raises."

Wachovia approved the Wells Fargo bid despite an exclusivity agreement and potential legal ramifications because directors believed they had a fiduciary duty to accept the higher bid, a source told the Wall Street Journal.

"It seems from the questions there's a controversy on this issue, and that'll be addressed in the appropriate way," Steele said an investor conference call Friday morning.

Wells Fargo said it did not talk to Wachovia after the deal with Citigroup was signed but continued to review the data previously provided to all bidders. It presented Wachovia with a board-approved proposal Thursday night, Wachovia said.

Wells Fargo chairman Richard Kovacevich said the bank has spoken with regulators and believed they "would comfortable with what has transpired here."

"We think this deal is solid," Kovacevich said in the conference call. "We are not aware of any merger agreement that has been consummated at the time. ... We feel very confident that this transaction has been done appropriately."

For Wells Fargo, Wachovia's East Coast focus would give it a coast-to-coast banking presence. For Citigroup, a Wachovia merger would finally solidify its standing in retail banking and make it one of the three largest deposit holders in the U.S.

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