What does Wells Fargo want? Wachovia, as it turns out.

In a stunning turnabout, Wells Fargo has agreed to acquire Wachovia for $7 per share in stock, or about $15 billion.

The announcement comes just four days after Citigroup agreed to buy the retail-banking business of Wachovia for $1 per share in a deal orchestrated by government regulators. Wells Fargo is buying the entire company, including the A.G. Edwards brokerage operation.

Citi, as one could guess, is not very happy, saying the deal "is in clear breach of an exclusivity agreement between Citi and Wachovia."

"Citi has demanded that Wachovia and Wells Fargo terminate and not proceed with any proposed transaction."

(Karen Donovan examines the core legal issue here and here.  Megan Barnett notes the errant question mark on Citi's Web site here.)

The Wells Fargo raid clearly took regulators by surprise.

“The F.D.I.C. stands behind its previously announced agreement with Citigroup,” Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp., said in a statement. “The F.D.I.C. will be reviewing all proposals.”

"We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,” the Federal Reserve and Office of the Comptroller of the Currency said.  

Felix Salmon contends that "Citi's best hope of derailing the Wells Fargo-Wachovia deal would be if Citi can persuade the regulators not to approve it"

If the Wachovia deal survives any legal challenges from Citi, Wells Fargo will have confirmed its membership in the elite club of U.S. commercial banks. Because of the credit crunch, the balance of power in the U.S. financial system is now largely in the hands of four banks: Citigroup, Bank of America, J.P. Morgan, and Wells Fargo. (For a look at the banking behemoths, click here.)

These banks will have unprecedented sway over the economy, but because of their size and importance will be regulated and scrutinized like no other American companies ever have been. For now and years to come, these four are officially too big to fail.

For jittery investors, the deal will also inspire new confidence. Wells Fargo's move demonstrates that there will be private money available in the rescue of financial institutions as well as government help. The announcement comes hours before the House will vote on a $700 billion plan to buy troubled mortgage assets from institutions.

And the deal provides some degree of vindication to Robert Steel, the former Treasury executive who left just months ago to lead Wachovia. Steel, once a Goldman Sachs executive, has been criticized, as Andrew Ross Sorkin of the New York Times detailed on Tuesday, for talking optimistically about the bank's prospects just two weeks ago, when Wachovia shares were trading above $10.

The apparent sale to Citi for $1 per share crushed some longtime supporters of Steel.

"I believed in the guy," Jim Cramer said on his Mad Money show on Monday night, "Did he take advantage of me? Perhaps, yes."

A sale for $7 per share, without government intervention, looks much better for Steel than a $1 fire sale.

"This deal enables us to keep Wachovia intact and preserve the value of an integrated company without government support," Steel said in a statement today. The board of Wachovia approved the deal Thursday night.

The rapid turn of events will raise some questions.  It will certainly increase scrutiny of Wells Fargo's balance sheet. The bank is a huge mortgage lender that could see delinquencies and foreclosures climb as the economy sinks.

Before today's news, Peter Eavis of the Wall Street Journal pointed out that Wells Fargo has $73 billion of home-equity loans, "many of which were made in the same markets as Washington Mutual, whose assets were sold last week to J.P. Morgan."

"J.P. Morgan's assumptions signal that Wells still could sustain substantial losses," Eavis says.

And now it will add on Wachovia? Nearly half of Wachovia's mortgage lending has been in California and Florida, two states with some of the highest foreclosure rates in the nation. Ouch.

Still, the Wells Fargo move apparently has the golden seal of approval from Warren Buffet: Berkshire Hathaway is the bank's largest shareholder, with a 9 percent stake.

First Goldman Sachs and General Electric—and now Wachovia? Forget about Hank Paulson or Ben Bernanke. The most important figure in finance right now may be the guy from Omaha.