World finance firestorm outpaces firefighters

With the flames of the financial crisis outrunning renewed central bank intervention and the nationalisation of United States insurance titan AIG, US media reports, meanwhile, said Morgan Stanley was looking for help.

The latest US drama was unfolding against a background of plummeting global stocks and yields, or interest rates, on US Treasury bonds as investors rushed for the safety of government debt instruments.

The Bank of Japan made the latest of a series of interventions to support the Japanese banking system, pouring in the equivalent of $23,9-billion, and the Russian stock market was closed even before trading opened, marking the third closure in three days.

The reports in New York said Morgan Stanley, one of the last two independent US-based investment banks, was negotiating a merger with another firm.

In London, the Halifax Bank of Scotland (HBOS) became the latest victim of the firestorm when British bank Lloyds TSB said it was acquiring this leading British mortgager in an all-share deal worth £12,2-billion.

The bail-out came after HBOS stocks had plummeted in wild trading on Wednesday.

The New York Times reported that Morgan Stanley was in talks to merge with Wachovia Corporation. Separately, CNBC business network said that the bank was in talks to be bought by the Chinese bank CITIC.

AIG, Lehman Collapses May Spur Financial Fire Sales

Lehman Brothers Holdings Inc.'s collapse and Merrill Lynch & Co.'s takeover by Bank of America Corp. are the first examples of what bankers say will be a spate of takeovers, as forced sellers seek an exit.

``There will be more bank consolidation and asset sales as people are forced to take tough decisions,'' said Philip Keevil, a senior partner in London at Compass Advisers LLP and former Salomon Smith Barney Inc. banker. ``It will be the weak offering themselves to the strong.''

Barclays Plc agreed today to buy Lehman's U.S. investment banking unit for $1.75 billion, three days after abandoning plans to acquire the entire securities firm. American International Group Inc., which received an $85 billion bailout from the U.S. government yesterday, is most likely to repay the loan by liquidating or selling assets, central bank officials told reporters on the condition of anonymity.

``We are now entering the next phase of the crisis, one that may require forced consolidation,'' UBS AG analyst Philip Finch said in a note to clients this week. The broker-dealer model used by investment banks is broken, and history suggests more banks will fail or be forced to merge following Lehman's collapse, he added.

Banks and insurers worldwide have booked more than $510 billion in losses and writedowns since the global credit crisis began about 13 months ago, wiping about $11 trillion from the value of global stocks along the way. That has prompted banks to seek cash injections and sell assets to shore up capital. Bank of America's $40 billion takeover of Merrill is the biggest element of $71 billion in acquisitions announced this month alone, almost twice the amount in the same period a year ago, data compiled by Bloomberg show.

HBOS Sale Talks

Lloyds TSB Group Plc, the bank that considered buying Northern Rock Plc before it collapsed, is in discussions to buy HBOS Plc after the mortgage lender lost three quarters of its stock market value this year.

The banks are in ``advanced talks,'' Edinburgh-based HBOS said in a statement today, without disclosing any details. A combination with Lloyds, based in London, would create a lender with a 28 percent share of the U.K. mortgage market, according to the Council of Mortgage Lenders.

``All these banks are going to have to clean up their balance sheets,'' said Bernard Gault, a London-based partner of Perella Weinberg Partners LLP. ``People are going to have to decide what to do next.''

Buyers may seek all or parts of Washington Mutual Inc., whose credit rating was cut to junk on Sept. 15, analysts and investors say. In the U.K., HBOS and Royal Bank of Scotland Plc were both earlier this year seeking to sell divisions.

Capital Raising

Seattle-based Washington Mutual has dropped 83 percent so far this year, leaving the lender with a market value of about $4 billion. Facing up to $19 billion in bad loans over the next 2 1/2 years, the bank may be forced to sell all or part of itself to raise capital, according to analysts including Bert Ely, president of consulting firm Ely & Co. in Alexandria, Virginia. The banks may also have to sell parts of a nationwide 2,300-branch network to raise capital.

Edinburgh-based HBOS has also been exploring a sale of its Australian units that may raise as much $5.7 billion, three people familiar with the plan have said.

``There will be those looking to take advantage of the crisis,'' said Charles Arsouze, a lawyer specializing in M&A, capital markets and securities law proceedings at Paris-based Fontaine Mitrani & Associates.

Edgy Buyers

Buyers are still skittish. In Europe, Royal Bank of Scotland has been struggling to sell its insurance units to bolster capital after reserves were depleted by writedowns and the purchase of part of ABN Amro Holding NV last year. Commonwealth Bank of Australia scrapped talks last month to buy ABN Amro's investment banking and corporate finance units in Australia and New Zealand, citing financial market turmoil.

UBS's Finch said banks that stand to benefit most from potential consolidation are Credit Suisse Group, JPMorgan Chase & Co. and HSBC Holdings Plc.

``The companies that are doing deals today are saying things have been way too expensive until now,'' said Gault of Perella Weinberg Partners. ``And it's time to do something.