Bank merger talks heat up

Rumors are flying on Wall Street that Washington Mutual has put itself up for sale and that Wachovia and Morgan Stanley are considering a merger.

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By David Ellis and Tami Luhby, staff writers

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NEW YORK ( -- Wall Street isn't finished yet.

In a two-day span, Lehman Brothers (LEH, Fortune 500) filed for bankruptcy, Bank of America (BAC, Fortune 500) snapped up Merrill Lynch (MER, Fortune 500) and American International Group (AIG, Fortune 500) received an $85 billion government loan.

On Wednesday, rumors swirled about other banks pairing up.

Washington Mutual (WM, Fortune 500) reportedly has put itself up for sale, hiring Goldman Sachs (GS, Fortune 500) to advise it. Possible suitors include JPMorgan Chase (JPM, Fortune 500), HSBC (HBC), Citigroup (C, Fortune 500) and Wells Fargo (WFC, Fortune 500), according to published reports.

However, a person close to the situation told that JPMorgan Chase is not bidding on WaMu.

A WaMu spokesman declined to comment on the merger reports. But the bank did say that TPG Capital, its biggest shareholder, is now allowing it to raise money or sell itself without compensating TPG. The private equity firm invested $7 billion in the struggling savings-and-loan in April.

"It became clear that it would be in the best interests of Washington Mutual and our investors to waive the price reset payment provisions that were agreed to with the bank at the time of our original investment in April 2008, TPG Capital said in a statement. "Our goal is to maximize the bank's flexibility in this difficult market environment."

This removes a big barrier for WaMu, whose shares have tumbled over the past week as two credit rating agencies downgraded it to junk status over concerns it could not raise much-needed capital.

Meanwhile, Wachovia (WB, Fortune 500) is said to be considering a merger with Morgan Stanley (MS, Fortune 500), whose share price has been battered despite reporting better-than-expected earnings late Tuesday afternoon. Morgan Stanley is one of only two stand-alone investment banks left on Wall Street.

Still, Wachovia has also been hit hard by the mortgage meltdown. The company reported a $9 billion loss in the second quarter -- the company's second consecutive loss -- and also slashed its dividend by 87%

Wachovia's problems cost then CEO Ken Thompson his job in June. He was replaced a month later by Robert Steel, a former Treasury undersecretary.

Spokespeople for Citigroup, Washington Mutual, JPMorgan Chase, Goldman Sachs, Wachovia and HSBC declined to comment. Morgan Stanley did not immediately return calls seeking comment.

The flurry of activity signals the financial industry is testing the waters, said Jason Tyler, a senior vice-president at the Chicago-based Ariel Investments, which manages about $9 billion. But he cautioned that not every merger report will turn out to be true.

"You have bankers throwing rumors around trying to see how the market would react to things," Tyler said. "It is going to be impossible to tell rumor from fact for a while. We are going to hear 10 times as many rumors for every serious conversation."  To top of page

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