Wachovia customers must be feeling like the belle of the ball with two suitors duking it out over them. But this is a fight that could get bloody.

Wells Fargo, a major banking presence in the western half of the country, says it is merging with Wachovia, a leading institution on the eastern half, in a deal that will include “all of Wachovia’s banking operations in a whole company transaction requiring no financial assistance from the FDIC or any other government agency.”

That, apparently, isn’t sitting well with Citigroup, which announced Sept. 29 that it had reached an agreement in principle to acquire Wachovia’s banking operations. In that deal, the FDIC agreed to provide loss protection for billions of dollars in mortgage loans and other assets in exchange for preferred stocks and warrants. Wachovia Corp. would continue to own Wachovia Securities, a brokerage, and Evergreen Asset Management.

“The Wachovia-Citi deal was an ‘open bank’ transaction,” says Christopher Whalen, senior vice president at Institutional Risk Analytics. “The FDIC negotiated the deal, they gave consideration to Citi and they took consideration in the form of warrants. The role of the FDIC was much more akin to what they did in the 1930s, which was acting in an open bank situation. They’re providing resources and they’re taking an equity position in the buyer. They ran the transaction brilliantly.”

Breach of an agreement?

But all of that will be for naught if the Wells Fargo-Wachovia marriage is approved by regulators.

Citi isn’t taking this sitting down. The company says Wachovia’s “agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia.” Citi says it has been providing liquidity to support Wachovia and is threatening to file a lawsuit unless Wachovia and Wells end their transaction.

The FDIC issued a news release noting that the agency is standing behind its agreement with Citigroup, but will review the Wells Fargo proposal and work “with the primary regulators of all three institutions to pursue a resolution that serves the public interest.” The big benefit for the FDIC in the new arrangement would be that its assistance is not needed.

No matter which deal goes through, the FDIC says Citigroup and Wells Fargo would stand behind all creditors including insured and uninsured depositors.

According to Wells Fargo, the combined company would have $1.42 trillion in assets, deposits equaling $787 billion, and 48 million customers.

Stay tuned.