Banks get breathing room
The massive government rescue of banks could buy time, and possibly more options, for institutions whose fate hangs in the balance.
NEW YORK (CNNMoney.com) -- Should a more concrete government plan emerge over the weekend to help solve the ongoing credit crisis, it could give some banks left for dead by Wall Street more time and more alternatives than seemed available just days earlier.
Leading investment bank Morgan Stanley (MS, Fortune 500), for example, which is rumored to be eyeing a possible merger with commercial bank Wachovia (WB, Fortune 500), may be able to remain independent.
A source close to the situation told CNNMoney.com that Morgan Stanley believed the latest developments give the firm more time to decide its next move.
The source added, however, that the firm was continuing to evaluate all of its options.
One bank expert said that Morgan Stanley isn't the only financial firm that can now take a step back and review all possible plans for the future.
"I think that they are thinking to themselves, 'What can we do today that we couldn't do yesterday?' " said Gary Townsend, a former bank analyst at Friedman, Billings, Ramsey, who now serves as the president of the Chevy Chase, Md.-based Hill-Townsend Capital.
Details of the government plan so far remain slim, even as Treasury Secretary Henry Paulson warned Friday it would cost "hundreds of billions of dollars." It is widely believed to involve letting banks rid themselves of their problematic mortgage-related assets.
Such a move would not only go a long way towards providing relief to investment banks and brokerages that bet on risky mortgage-backed securities, but also those firms that sold the mortgages in the first place like Washington Mutual (WM, Fortune 500) - the nation's largest savings and loan.
Just this week, the Seattle-based firm has had its credit rating lowered to junk status by the top credit rating agencies. At the same time, there has been rabid speculation that WaMu is looking for a buyer after reportedly hiring Goldman Sachs as an advisor. Wells Fargo (WFC, Fortune 500), Citigroup (C, Fortune 500) and HSBC (HBC) have all been mentioned as possible suitors.
A government purchase of the company's worst assets could make an independent WaMu more likely. But it could also make what's left of the savings and loan more attractive to a buyer, said Howard Shapiro, an analyst with Fox Pitt Cochran Caronia.
"It was going to be very hard to get anyone to buy WaMu if they had to take on the toxic waste," he said. "If you don't have to take that on, then what you are left with is a very, very valuable retail branch system and that is an easier sale."
Financial stocks have certainly been on a roller coaster ride this week, following Monday's decision by Lehman Brothers to file for bankruptcy and broader fears about the fate of the industry.
Bank stocks built on their late-Thursday gains and surged Friday. The S&P Banking Index rose 8% Friday.
While talk of a government solution to the credit crunch helped financials stage an impressive rebound, Friday's announcement by the Securities and Exchange Commission to temporarily ban the short selling of 799 financial companies also fueled the rally.
Short sellers borrow stock with the aim of selling it, then buying it back at a lower price, hoping to pocket the difference. The commission said short sellers add liquidity to the markets during normal conditions, but recent unbridled short-selling has contributed to the recent tailspin in the stock market, especially in financial stocks.
Goldman Sachs (GS, Fortune 500), which have garnered much of the market's attention in recent days following Monday's bankruptcy filing by rival Lehman Brothers, gained 20%. Shares of Bank of America (BAC, Fortune 500) and Merrill Lynch (MER, Fortune 500), which announced a merger Monday worth roughly $50 billion, finished up 23% and 34% respectively.
For some firms, however, the recent bounce back in their stock price cuts both ways, warned Townsend. The company may find themselves more fairly valued and willing to make a deal with a potential acquirer. Or, they could gain a false sense of security about just how strong they really are and try and go it alone.
"Perception has a lot do with the reality of things," said Townsend. "What the market has given today may well be taken back tomorrow." 
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