Never piss off a regulator. Citi’s executives are now paying the price for having done so.

From the WSJ:

The Federal Deposit Insurance Corp. is pushing for a shake-up of CitigroupInc.’s top management, imperiling Chief Executive Vikram Pandit, people familiar with the matter said.

The FDIC, under Chairman Sheila Bair, also recently pressed a fellow regulator to lower the government’s confidential ranking of Citi’s health — a change that would let regulators control the firm more tightly.

The FDIC’s willingness to take an increasingly tough position toward one of the nation’s largest and most troubled financial institutions is setting up a bitter clash between regulators — some of whom disagree with the FDIC’s position — and between the FDIC and Citigroup, whose officials have argued that Ms. Bair is overstepping her authority.

“The FDIC is our tertiary regulator,” behind the Office of the Comptroller of the Currency and the Federal Reserve, said Ned Kelly, Citigroup’s chief financial officer.

Citigroup has taken steps to shrink itself and clean up its financial mess. Just last month, the bank performed better than expected on the Federal Reserve’s “stress test” of top banks’ strength.

This is all about two things.

First, go back to the Wells, Citi, Wachovia fiasco. When Wells outsmarted Citi for the prize, Pandit evidently lashed out Sheila Bair. She has been simmering ever since. Now it’s payback time. Bair really is a bit player when it comes to Citi but she’s riding high on publicity and seems to be an Obama favorite. So, it’s probably adios Vikram and let me show you the corner office Mr. Grundhoffer, the former U.S. Bancorp CEO who just joined the board. 

Second, Bair is fighting furiously for a big piece of the new regulatory pie. The rest of the boys don’t like her and probably with some good reason. She’s been aggressive at pushing her own agenda rather than playing team ball throughout the crisis which has been an annoyance at best and counter productive at worst. Muscling in on Citi gives her street cred and makes the others look timid. Notice, what she’s promoting has little to do with substance but plays great in the press. The lady knows how to play the game.

No one is going to go to bat for the Citi execs. Their toast and Bair will get some points for taking on the big boys while the supposedly coopted Treasury and Fed tried to go easy on them, but I still wouldn’t bet on her moving up big time in the regulatory scheme.

Still, some officials across the government are frustrated at the company’s pace of change. FDIC officials in particular are concerned about the lack of senior executives with experience in commercial banking. Mr. Pandit himself comes from an investment-banking background, but most of the bank’s current problems stem from troubled consumer loans.