Oct. 6 (Bloomberg) -- Citigroup Inc. and Wells Fargo & Co. may end up splitting Wachovia Corp., the Charlotte, North Carolina-based bank staggered by almost $53 billion of mortgage- related losses.

Wells Fargo's $15.1 billion offer on Oct. 3 trumped New York-based Citigroup's $2.16 billion bid with assistance from the Federal Deposit Insurance Corp. for parts of Wachovia, setting up a takeover fight for a bank with 20 million customers and almost $450 billion of deposits.

``There is a point at which the FDIC will take Wachovia over if they are concerned about the stability of the bank,'' said Christopher Whalen, managing director of Institutional Risk Analytics, an independent research firm in Torrance, California. ``But as long as Citi and Wells will extend support to Wachovia, they have time.''

To end a legal skirmish, Citigroup may agree to take Wachovia's branches in the northeast and mid-Atlantic regions, while Wells Fargo would get the Southeast and California branches, as well as Wachovia's asset-management and brokerage units, the Wall Street Journal reported, citing people familiar with the situation.

Bank officials and FDIC spokesman David Barr declined to comment. Cable network CNBC reported that Citigroup was bidding for all of Wachovia. Citigroup spokeswoman Shannon Bell didn't immediately return a call seeking comment.

Vikram Pandit, Citigroup's chief executive officer, has been counting on the purchase of Wachovia's banking operations to help rebuild after three quarters of losses totaling more than $17 billion. San Francisco-based Wells Fargo said last week that acquiring Wachovia would give it a banking presence in 39 states, up from 24, and make it the No. 1 consumer bank in 10 of the country's 20 biggest metropolitan areas.

Stock Reaction

Citigroup dropped 8.5 percent to $16.79 in 10:45 a.m. New York Stock Exchange composite trading. Wachovia fell 9.8 percent to $5.92 and Wells Fargo fell less than 1 percent to $34.40.

Citigroup tried to block Wells Fargo's agreement in court over the weekend, prompting officials from the Federal Reserve and U.S. Treasury to intervene. Federal officials have been concerned that a Wachovia failure may pose a ``systemic risk'' that would set off collapses in the rest of the banking system, according to an affidavit from Wachovia CEO Robert Steel filed in federal court. He cited a conversation with FDIC Chairman Sheila Bair.

``I'm astounded that Citi wants to be involved,'' Whalen said. ``Just buying these deposits from Wachovia isn't the answer.'' Whalen notes that Citigroup is likely to report high loan losses in the third and fourth quarters and it's unclear if Pandit's efforts to reduce costs and boost revenue are panning out.

Bernanke, Pandit

Fed Chairman Ben S. Bernanke spoke separately with Pandit and Wells Fargo Chairman Richard Kovacevich to find a solution, The New York Times reported. The two bankers didn't speak directly to one another, the Times said.

``Treasury is in regular contact with the Fed and the FDIC and is staying on top of the situation,'' said Treasury spokeswoman Jennifer Zuccarelli. The Fed's David Skidmore declined to comment.

Wachovia has said Wells Fargo's bid is better for shareholders, employees and taxpayers because, unlike Citigroup, it doesn't rely on government aid.

Under the split being discussed now, neither Citigroup, the biggest U.S. bank by assets, nor Wells Fargo, the biggest bank on the U.S. West Coast, would get U.S. financial assistance, the Journal said.

Legal Wrangling

The two suitors spent the weekend wrangling in state and federal court, with Citigroup winning a New York state ruling on Oct. 4 that said it had the exclusive right to negotiate a takeover with Wachovia until Oct. 10. That ruling was overturned on appeal yesterday, leaving today's expiration date in place.

The takeover battle began Sept. 29 when Citigroup made its bid with backing from the FDIC to rescue Wachovia from declaring bankruptcy, according to documents provided by Citigroup. Wells Fargo, which said it was unable to complete a competing bid in time to be considered, returned with its higher offer later in the week, which Wachovia accepted. Citigroup said this violated a signed agreement not to solicit new offers.

Wachovia said yesterday in a complaint filed in the U.S. district court in New York that Bair, who initially agreed to provide financial support to the Citigroup bid, later helped broker the deal with Wells Fargo.

`Serious Attention'

On Oct. 2 at about 7 p.m. local time, Bair called Wachovia's Steel, 57, and told him to expect a call from Wells Fargo's Chairman Richard Kovacevich, 64, regarding the bank's offer of $7 a share, according to the complaint. Bair encouraged Steel ``to give serious consideration to that offer,'' according to the Wachovia court filing.

``Officials from both the Treasury Department and the Federal Reserve also contacted Wachovia's lead outside counsel to inform him that the offer from Wells Fargo was forthcoming and that Wachovia should give it serious attention,'' according to the complaint.

Andrew Gray, a spokesman for the FDIC, didn't return a message left on his mobile phone seeking comment.

Steel said in an affidavit that he agreed to the Wells Fargo deal partly because the FDIC was threatening to put its banking operations into receivership if a ``definitive merger agreement'' with either Citigroup or Wells Fargo wasn't signed by Oct. 3.

`Difficult' Discussions

Wachovia's discussions with Citigroup had ``proved extremely complicated and difficult,'' whereas Wells Fargo's offer was ``simpler, easier for shareholders to understand, more likely to close and more likely to receive shareholder approval,'' Steel said.

After Wachovia's board approved Kovacevich's offer, Bair and Steel phoned Citigroup's Pandit, 51, to say that Wachovia had agreed to the Wells Fargo deal, Steel said. When Citigroup opted to fight Wells Fargo, Wachovia took the case to federal court.

Steel stands to benefit from any improvement in bids for Wachovia. Recruited from the Treasury department in July to rebuild the lender's credibility with investors, he bought 1 million shares of Wachovia stock for about $16 million two weeks after arriving at the company.

Stakeholders' Endorsements

Wells Fargo's bid has won endorsements from stakeholders, including Davis Selected Advisers LP, the Dodge & Cox mutual fund group and the Sandler family, according to a statement. The Sandlers sold Golden West Financial Corp. to Wachovia in 2006 for about $24 billion, when Wachovia was run by CEO Kennedy Thompson. The unit's option-ARM home loans have since been blamed for contributing to Wachovia's record quarterly losses and Thompson lost his job.

Wachovia is being represented by David Boies, 67, the chairman and co-founder of New York-based law firm Boies, Schiller & Flexner. He's also the lead lawyer for Maurice ``Hank'' Greenberg, the chairman of CV Starr & Co. and former chief executive officer of American International Group Inc. Boies represented the U.S. Justice Department in the 1998 antitrust case against Microsoft Corp. and argued unsuccessfully on behalf of then-U.S. Vice President Al Gore in the 2000 election battle with President George W. Bush.

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Patricia Hurtado in Brooklyn, New York, at pathurtado@bloomberg.net

Last Updated: October 6, 2008 11:35 EDT