In the banking world, nothing can go right these days. Seriously, absolutely nothing.

First, a recap of last week's events: On Monday, Citigroup (NYSE: C) made an offer to buy Wachovia 's (NYSE: WB) banking operations for about $1 per share, with a fat government backstop that took care of losses beyond the first $42 billion on a $300 billion pool of Wachovia's loans.

On Friday, Wells Fargo (NYSE: WFC) shook things up with a surprise $7-per-share bid for the entire company, and offered to do it without any government help. Without question, the deal was far sweeter for both Wachovia shareholders and taxpayers. For the first time in recent memory, free markets triumphed, whoo-hoo!

Good news, right? In a perfect world, yes, but our markets are more like something between a soap opera and a science-fiction novel, so you know this story gets better.

Free markets, meet free courts
On Saturday, a group of Citigroup lawyers visited a New York judge at his house, persuading him to temporarily block the pending Wells Fargo transaction because Citi had an "exclusivity agreement" that prevented Wachovia from striking a deal with anyone else.

Then last night, the jesters kicked it into high gear, with that ruling being overturned by a New York State appellate court. Not surprisingly, Citigroup says it intends to appeal the ruling … and around and around we go.

What should irk you -- the taxpayer -- is that Wells Fargo's offer didn't include any government backstop, as Citi's offer did. From that standpoint alone, you'd think Wells Fargo's offer would have been ushered in by regulators, yet it was (at least temporarily) shot down by the courts. Perhaps bailouts have become so commonplace that no one knows how to handle a deal without one.

All of this just for Wachovia?
Why Citi and Wells Fargo are fighting so viciously isn't much of a surprise; Citigroup's drooling over Wachovia's $400 billion deposit base, which it can use as a cheap source of funding in lieu of short-term debt markets that have practically disintegrated. Doing so could let Citi to regain its footing over Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) -- the other two alpha banks that haven't been nearly as hammered as Citi has in the past year.

Wells Fargo could make serious headway on B of A and JPMorgan with Wachovia's presence in the East, its brokerage unit AG Edwards, and its asset management division. Both Citi and Wells could reap a huge reward by exploiting a new tax law that'll let them charge Wachovia's write-downs as an offset on their own net income, meaning much lower tax bills could be in store for whoever gets a hold of Wachovia.

What happens from here? As has been the case in recent weeks, probably something that no one can predict and that completely bewilders markets when it happens. In its current form, the most likely outcome is either Wells Fargo prevailing, buying the entire company for $7 per share, or Citi and Wells further duking it out, divvying up Wachovia's assets between them.

Until then, the hamster wheel continues to spin at a frantic pace. Stay tuned.

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