The move comes hours after Citigroup, whose planned purchase of Wachovia was scuttled by Wells Fargo, announced it filed a complaint seeking more than $60 billion from the two banks.
Citigroup accused Wachovia and Wells Fargo of interfering with its earlier purchase agreement.
Citigroup agreed last Monday to take over Wachovia's banking operations in a $2.2 billion deal, backed by the Federal Deposit Insurance Corp. Wells Fargo unexpectedly announced four days later it would acquire all of Wachovia for $15.1 billion with no federal assistance.
The litigation pause, effective until noon on Wednesday, was done in consultation with the Federal Reserve.
The banks will use the time to try to broker a settlement, though discussions are still in the early phase, said a source familiar with the negotiations.
"There is still a long way to go before anything is achievable," said the source.
The banks spent the weekend fighting in federal and state courts over the fate of Wachovia, which was near collapse last week.
Citigroup (C, Fortune 500) won a restraining order from a New York State Supreme Court justice just after midnight Monday to temporarily block the Wells Fargo takeover. That came after Charlotte, N.C-based Wachovia asked a U.S. District judge over the weekend to declare invalid part of the Citigroup deal that would have restricted Wachovia (WB, Fortune 500) from considering competing bids. The judge had originally scheduled a hearing in this case for Tuesday so that Citigroup could respond.
Federal officials are trying to mediate as concerns about the U.S. banking system's health mounts.
In the complaint announced Monday, Citigroup wants more than $20 billion in compensatory damages and more than $40 billion in punitive damages from Wells Fargo (WFC, Fortune 500) and Wachovia for "tortious interference" and bad faith breach of contract. Citigroup is basing the compensatory damages on its market cap loss, which on Friday equaled $20 billion.
Wachovia would have gone under last week if Citigroup had not stepped in with its offer, according to the complaint.
Under a Wells Fargo-Wachovia merger, Wachovia Chief Executive Robert Steel and other senior executives would receive golden parachutes worth $225 million, Citigroup said in the complaint, filed in New York State Supreme Court. They would not receive this "windfall" under the Citigroup deal.
Citigroup also said it delivered an executed copy of its merger agreement to Wachovia on Sunday.
A Wachovia spokesman said the bank has not received Citigroup's lawsuit. She declined to comment further. Wells Fargo did not respond to requests for comment.
Citigroup said it is pleased to work with the Fed in "a fair-minded, good faith process to achieve a prompt and successful outcome."
With all the turmoil in the markets right now, federal regulators will likely want to settle the matter quickly, experts said.
And on a day when stocks plunged sharply, shares of these three banks were no exception. Citigroup shares fell more than 5% Monday. Shares of Wachovia dropped nearly 7% while Wells Fargo fell 2.7%.
"Right now the market is not very fond of uncertainty," said Donna Hitscherich, faculty member of Columbia University's Graduate School of Business.
The battle will likely end in some kind of settlement, perhaps dividing Wachovia's retail operations between New York City-based Citigroup and San Francisco-based Wells Fargo, said Ann Graham, a banking law professor at Texas Tech University.
Citigroup made mistakesSome investors cheered Citigroup's decision last week to buy Wachovia's banking assets even though the company is wrestling with a massive restructuring effort. Citigroup has posted close to $18 billion in losses over the past three quarters.
But other market experts, including outspoken fund manager Bill Ackman of Pershing Square Capital Management, faulted Citigroup for failing to seal the deal in a timely manner.
"[There were] definitely mistakes made," said Ackman Monday at a value investing conference in New York. "Citi acted as if the deal was done."
Ackman, whose firm bought about 180 million shares of Wachovia stock just hours after the Citigroup-Wachovia deal was first announced, said he envisioned several end games in the unfolding Wachovia drama, including either Citigroup or Wells Fargo, or both, putting up a higher offer.
Should Citigroup win out, Wachovia's remaining A.G. Edwards brokerage unit and Evergreen Investments asset management business could prove attractive for companies such as Goldman Sachs (GS, Fortune 500) or Morgan Stanley (MS, Fortune 500), Ackman speculated.
A tie-up with Wachovia, however, would most likely prove costly for either firm. Wells Fargo warned it expected to incur about $10 billion in merger-related costs. Both institutions would have to take significant writedowns against Wachovia's troubled loan portfolio.
Why they want WachoviaA Wells Fargo victory would transform the bank, whose operations and branches are largely located in the Midwest and on the West Coast, into a dominant presence along the East Coast and in the Southeast.
That would put Wells Fargo squarely in competition with the likes of JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500).
Should Wells Fargo ultimately prevail, it would control about $800 billion in deposits and have nearly 11,000 banking locations. If Citigroup wins, it would represent a huge step forward for the company's retail banking aspirations, whose footprint has lagged many of its biggest rivals.
No matter how the dispute ends, it would signal yet another major shakeup in the nation's banking industry. In the last month alone, the sector has undergone a dramatic facelift, including the failure of Washington Mutual and its subsequent purchase by JPMorgan Chase, as well as Bank of America's acquisition of Merrill Lynch (MER, Fortune 500).
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