24/7 Wall St.

There have been major reports for days and weeks that have revolved around many financial services, banks, lenders, and the like merging.  The truth is that the carnage in the financial sector is coming to head whether the U.S. heads into a recession or narrowly escapes, the only thing that is going to save these is actual mergers.   We think that Fed and Congress would be extra lax on any predatory acquisition if it keeps a major institution from failing.  It is dangerous ground to tread, but if you plow down into the potentials in an "if, then" scenario it isn’t exactly out of left field.  Despite our thought on the subject, that is opinion rather than fact.

We’ve already noted the Bank of America (NYSE: BAC) possible deal with Countrywide (NYSE: CFC) story bringing this to a head today.  Yesterday’s notation out of Berkshire Hathaway (NYSE: BRK-A) saying it would not rule out an outright acquisition in a bond insurance operation after starting one of its own last week.  We’ve got foreign sovereign funds buying stakes on what they hope is on the cheap, and we’ve got private equity doing bottom fishing in the distressed arena.

We can’t cover all of the potential names because it might end up being a tome.  But the Fed is going to probably give some incentives to the winners to save these dogs.  So who are some of the other usual suspects that might be on a Wall Street hit list of takeout candidates????

• Fifth Third (NASDAQ: FITB), Washington Mutual (NYSE: WM), Sun Trust (NYSE: STI) are usual suspects in larger banking that could teeter into a forced merger.
• Bear Stearns (NYSE: BSC) is one of the most vulnerable of the large brokerage and investment bankers, and in electronic trading you can count E*Trade (NASDAQ: ETFC) as the most damaged and most vulnerable here.
• Sallie Mae (NYSE: SLM) has been a true disaster story, and we’d expect that anything happening there would tend to be investments rather than another buyout attempt.
• On the bond insurers, AMBAC (NYSE: ABK) and MBIA (NYSE: MBI) are deemed as the most vulnerable of the larger players in the group.
• Capital One Financial (NYSE: COF) is deemed the most at risk of the credit card lenders with banks, and its warning close to a 52-week low today drives that home even more.
• Countrywide Financial (NYSE: CFC) is by far the most distressed out of the major mortgage lenders.

Now let’s look at the flip side.  We also want to think about which financial giants are running well and holding up that are going to survive this mayhem either way: 

• Among these would be Berkshire Hathaway (NYSE: BRK-A) of course.
• JPMorgan Chase (NYSE: JPM) is the healthiest of the big conglomerate financials, and  Bank of America (NYSE: BAC), Wachovia (NYSE: WB) and Wells Fargo (NYSE: WFC) have all been in trouble as far as stock prices but would be potential saviors or at least bottom fishers if there was some incentive being passed around the table.  On B of A, would the Fed change its 10% cap on deposit rates to save another major financial player?
• Annaly Mortgage (NYSE: NLY) recently launched via an IPO its Chimera (NYSE: CIM) in conjunction with Merrill Lynch (NYSE: MER) that we’ve noted as a vulture fund that is masquerading as a mortgage investment company.
• American Express (NYSE: AXP) has the strongest of credit portfolio’s, so it could position itself as an opportunist if it so chooses even though it has some caution now.
• Whether you like or approve of private equity or not, Blackstone (NYSE: BX) is impressively going after distressed assets in the sector that might not be quite as distressed as the prices are indicating.
• On the investment banking side we’d look for Goldman Sachs (NYSE: GS) to be the most attractive out of the entire group despite it openly warning of lower earnings out of many financials today, and we’d expect any of the solid investment banks out of England and the E.U. to take a shot with the U.S. Peso giving what may be an implied 20% or 25% discount in any buyouts.

Once again, these are just the majors.  There are potentially dozens more of these in each sector.  Stay tuned, this is a very fluid environment that is changing its stance left and right just like it’s a lithium user off the meds and on hallucinogenics.

Also, be advised that if you are a common shareholder in at 20% higher or 50% higher than today’s prices, there might not be a big payday at a huge premium.  In fact, in dating terms some of these might be referred to as mercy "something"…….  A bailout won’t save every institution or investor.

Bernanke using more aggressive tones on rate cuts is also helping bolster the fears out there.  The old conspiracy theory about the government rescue fund would give way to the "incentives" or relaxing of certain rules.  Is that true? It may be myth, it may be fact.  We aren’t going there.

There is something here for bottom fishers, conspiracy theorists, and speculators all.  Of course there’s also the risk that the strong allow the weak to just fail. Welcome to financial services stocks in 2008.

Jon C. Ogg
January 10, 2008

We routinely cover many mergers, speculations, spin-offs and more on our open email distribution list.  Many of these also appear in the Special Situation Investing Newsletter screen candidates as well.