This afternoon, Citigroup (NYSE: C) chose to walk away from its discussions to acquire Wachovia (NYSE: WB) but Citi will revive its $60 billion lawsuit against Wells Fargo (NYSE: WFC). Meanwhile, with its $122 billion portfolio of toxic option ARM mortgages -- which add gaps in borrowers' monthly payments to the loan principal -- Wachovia may be too radioactive for Wells Fargo to buy.

How did we get here? On September 29th, Citi thought it had a deal to buy Wachovia's banking operations for $2.2 billion -- Citi would absorb the first $42 billion in losses and stick the FDIC with the rest. In exchange, the FDIC would get $12 billion worth of Citi preferred stock. Last Thursday, Wells Fargo announced a deal to buy all of Wachovia for $15 billion without costing the FDIC anything. Citi sued, the FDIC encouraged the three parties to split the baby, and this afternoon Citi decided to withdraw.

But now that the field is open for Wells Fargo, should it continue with the deal or has it learned that Wachovia's bad assets will make the deal too costly? Although Wachovia would give Wells $448 billion in deposits in 3,300 branches in 21 states, it also has $122 billion worth of option ARM mortgages. These mortgages are likely to default in huge numbers over the next few years. That's because the average option ARM holder will see a 63% rise in monthly payments -- for an additional $1,053 per month. With the economy likely to deteriorate, that could burn a big hole in Wells' $48 billion in capital.

MOST NOTEWORTHY: GFI Group, Wells Fargo and Cirrus Logic were today's noteworthy downgrades:

• Goldman downgraded GFI Group Inc (NASDAQ: GFIG) to Neutral from Buy following the company's announcement that credit chief, Donal Fewer, left the company to go to a rival firm and that about two dozen brokers may defect to follow him.
• Oppenheimer cut Wells Fargo & Company (NYSE: WFC) to Underperform from Perform as they believe the company is under-reserved by at least $4.5B and that there is significant room for multiple contraction.
• Cirrus Logic Inc (NASDAQ: CRUS) was downgraded at Jefferies to Hold from Buy on valuation, as they believe the risk/reward is no longer favorable at current levels.

OTHER DOWNGRADES:

• Baird cut Ryder System Inc (NYSE: R) to Neutral from Outperform.
• Caterpillar Incorporated (NYSE: CAT) was downgraded to Market Perform from Outperform at Wachovia and to Neutral from Outperform at Credit Suisse.
• Goldman removed Royal Caribbean Cruises (NYSE: RCL) from its Conviction Buy List.

MAJOR PAPERS:

• While bank stocks aren't exactly hot, they triggered yesterday's rally because when J.P. Morgan Chase & Co (NYSE: JPM) and Wells Fargo & Company (NYSE: WFC) reported, there were no unexpected surprises, according to the Wall Street Journal's "Heard on the Street". The ups and downs in the sector are expected to continue.
• According to people familiar with the matter, the Wall Street Journal reported that Yahoo! Inc (NASDAQ: YHOO) may be moving closer to outsourcing its search advertising to Google Inc (NASDAQ: GOOG) after an initial test yielded what they considered to be positive results.

• The New York Times reported that AT&T Inc (NYSE: T) is planning today to make an announcement that they will gift $100M to improve the skills of the nation's work force and fight the problem of high school dropouts.

• Celgene Corporation (NASDAQ: CELG) is best known for its blockbuster drug Revlimid which is used treat multiple myeloma, a cancer which attacks blood and bones. For patients, it can prolong their lives about 2.9 years, or longer, according to Investor's Business Daily's "The New America".