Bank shares skyrocketed Friday as investors cheered the government's plans to take over the industry's troubled assets and curb short-selling.
Though many questions remain about how the plans would unfold, that didn't damper the enthusiasm. Shares of Wachovia Corp. rose 29 percent, to $18.75, and Bank of America Corp. rose more than 22 percent to $37.28. Shares of Morgan Stanley, which has talked to Wachovia about a potential merger, rose 21 percent to $27.21.
Some of the top news of the day regarding Charlotte's big banks:
Wachovia and Morgan Stanley: The market rally quelled the sense of urgency at Morgan Stanley, which is anxious to avoid the fate of its failed investment bank peers. "This just gives us a little more breathing room," said a person familiar with the New York bank's negotiations. Morgan Stanley and Goldman Sachs Group Inc. are the only major investment banks left standing on Wall Street; the other three have failed in this credit crisis or been bought out by commercial banks, which are seen as more stable.
On Friday, a source familiar with the Morgan Stanley negotiations said that "all options are still being considered." The Wall Street Journal reported Friday evening that the bank is still talking with Wachovia, and that Morgan Stanley's board is expected to discuss a deal over the weekend. Spokeswomen at both banks declined to comment.
Observers have wondered which bank would buy the other in such a marriage. But Guy Moszkowski, an analyst at Merrill Lynch, wrote that Wachovia's relative market stability increases the odds that Wachovia would be the purchaser. The day after news of the merger broke, Wachovia's shares rallied 59 percent, while Morgan Stanley's rose just 4 percent after dropping precipitously the day before.
When markets closed Friday, Wachovia was substantially larger by market capitalization — $40 billion to Morgan Stanley's $30 billion. When news first leaked of a possible deal, Morgan Stanley was the larger.
Bank of America deals: Meanwhile, Charlotte's other big bank, Bank of America Corp., is not bidding for troubled Washington Mutual Inc., a source familiar with the situation said Friday. Speculation had surfaced Thursday that Bank of America could be in the hunt to purchase the Seattle-based thrift, even though it agreed earlier this week to a $50 billion purchase of Merrill Lynch & Co.
But the market rally did throw some cold water on the Merrill Lynch plan. Some on Wall Street think that Merrill investors, who must approve the sale, might balk now that the Bush administration has sketched out a plan that could absorb Merrill's toxic assets.
Bank of America said Monday it would buy Merrill for $29 a share, then a 70 percent premium. Merrill investors would get only a 6.6 percent premium based on Friday's price.
Ken Thomas, a Miami-based banking consultant, wondered if Bank of America would be interested in the insurance business, since it might be able to get parts of AIG Inc. at fire-sale prices.
Reaction to government bailout plan: Also Friday, regulators said they intended to help remove troubled assets from the books of financial firms. Wachovia spokeswoman Christy Phillips-Brown said the plan "is important news for the U.S. economy, financial markets and the financial services industry.
"We applaud these constructive steps toward restoring confidence and stability in our financial system," she added. "We at Wachovia continue watching market events carefully and remain focused on excellent customer service and growing the value of our franchise."
Bank of America declined to comment on the assets plan, though its CEO, Ken Lewis, praised regulators' work during a speech in Washington, D.C. Regulators "have made very difficult decisions, and in my view, they've made the right ones," he said.
But Lewis also said that government regulation isn't a cure-all. "This may not be a popular position right now, but not all de-regulation is bad," he said. He praised the 1990s dismantling of rules that forbade interstate branch banking and mergers between commercial and investment banks.
Thomas said the government plan should effect a quicker bottoming out of the housing market, which would benefit both of Charlotte's banks.
Steven Mann, a finance professor at the University of South Carolina, predicted that banks will have to more often seek cash infusions from foreign banks or sovereign wealth funds, which could result in further regulation. "That's when the party's really going to get interesting," Mann said. "That will stir up Congress to a greater extent than they already are."
Reaction to short-selling plan: Representatives at Bank of America and Wachovia both declined to comment on the government's temporary ban on short-selling their shares, which was also announced Friday. The day before, Morgan Stanley issued a news release praising N.Y. Attorney General Andrew Cuomo's investigation into improper short-selling. Mack has complained to regulators this week about the toll that short sellers were taking on his company's stock.