Wells Fargo's Gamble

Yesterday it was announced that Citigroup is backing out of its plans to acquire Wachovia, ceding the company to Wells Fargo. Nevertheless, Citigroup intends to pursue their $60 Billion lawsuit against Wachovia and in turn Wells Fargo. While the sum Citi is seeking may seem a little ridiculous, this is a case with strong precedents, most notably Penzoil v. Texaco in 1987, and Citi has a good chance of extracting some serious cash from WFC. On top of all that, it turns out Wachovia may be expecting much greater losses on its loan book. Has Wells Fargo's mangement lost its mind?

Citibank is in really rough shape right now. Their balance sheet is downright scary for one. Even with the TARP, Citi is in a boat load of trouble. Any litigation for a sum this large would be a very lengthy process. $60 Billion would certainly shore up Citi's balance sheet. The question is whether Citi can wait that long. If Citi were to file for Chapter 11, Wachovia would be released from any agreements, thus nullifying the lawsuit. The one question remaining is if Citi ends up in conservatorship, will the government decide to pursue the lawsuit?