Fed said brokering deal for Wachovia

By Mark Felsenthal and Michael Erman

WASHINGTON/NEW YORK (Reuters) - The U.S. Federal Reserve is brokering discussions between Wells Fargo & Co (WFC.N) and Citigroup (C.N) over which of the banks will buy Wachovia's WB.N assets, people familiar with the matter said on Sunday.

The Fed is pushing the two banks to compromise by potentially carving up Wachovia between them, the Wall Street Journal reported. Wachovia, the sixth-largest U.S. bank, has been hobbled by the credit crisis but has an attractive branch network.

Charlotte, North Carolina-based Wachovia is the latest casualty of a crisis that has led to shotgun sales of Bear Stearns and Merrill Lynch & Co MER.N, the near collapse of American International Group (AIG.N), and the bankruptcies of Lehman Brothers Holdings (LEHMQ.PK) and Washington Mutual (WAMUQ.PK).

Wells Fargo and Citigroup spent much of the weekend fighting in state and federal court -- as well as a judge's home in Connecticut -- over which party was entitled to move ahead with a deal to buy Wachovia assets.

The Federal Reserve views resolving the dispute as important, having already decided that Wachovia must be sold for the sake of the stability of the financial system, a person familiar with the matter said. Discussions were continuing late on Sunday, the person added.

Citigroup reached a preliminary agreement to buy Wachovia's banking assets for $2.2 billion (1.25 billion pounds) in a deal backed by the U.S. government on Sept 29. Wachovia did not sign an official merger agreement with Citi, although it did sign an agreement to negotiate exclusively with Citigroup through Oct 6.

But on Friday, Wells Fargo, the seventh-largest U.S. bank by assets, said it signed an agreement with Wachovia to buy the entire company without the government's help, apparently topping the Citigroup offer.

SATURDAY NIGHT IN CONNECTICUT