Yesterday, as equity markets went into freefall, Citi took off the gloves. The bank filed a $60 billion lawsuit against Wells and Wachovia, which now favored Wells' more attractive offer.

Washington, in an attempt to save face after a botched bank bailout at the very time it couldn't afford to slip up, urged cooler heads to prevail. Given the vast, systemic dislocations in the financial system, a protracted takeover battle would benefit no one.

Just hours after filing its lawsuit, Citi repented. The 3 banks signed a truce of sorts, agreeing to stay out of the courts for at least the next 48 hours. There's now talk Wells and Citi will divvy up the spoils, carving up Wachovia's branch network along geographic lines.

As I write this morning, Wachovia's fate is unknown. Whether that will be the case by lunchtime is anyone's guess.

By all accounts, Wells' bid makes more sense, it being the far stronger firm and eschewing the FDIC's involvement in the transaction. Citi, however, has yet to capitalize on the bank firesale its competitors are taking advantage of, and it doesn't want to miss the party.

JPMorgan has already snatched up Bear Stearns and WaMu for a song apiece. Meanwhile, Bank of America (BAC) grabbed Merrill Lynch (MER) during the turmoil following the implosion of AIG (AIG) and Lehman Brothers. B of A also managed to complete its Countrywide takeover - in which it arguably acquired nothing more than a truckload of pending lawsuits and a broken business model.

However the drama ends in addition to lawyers raking in millions in fees, the net result will be the removal of another wounded player from the financial field. This is a positive development, and a step in the direction of remaking the banking landscape with a more solid foundation.

Losses on Wachovia's mortgage portfolio, jammed full of option arms from its ill-timed purchase of Golden West, will likely result in higher losses than expected. Home prices in California's more affluent areas, to which Golden West was highly levered, are poised for dramatic whoosh down.

Washington would be well advised to decide Wachovia's fate such that months from now, the winner won't come knocking for a bailout of its own.