Shares of Wachovia Corp. and National City Corp., two companies laden with bad mortgages, plunged Friday as lawmakers continued to work on a bailout plan and the industry absorbed the news of the largest banking failure ever.
Wachovia's shares sank 27% as reports emerged late Friday that the Charlotte company had initiated merger negotiations with Citigroup Inc., Wells Fargo & Co., and Banco Santander Central Hisapno SA. Wachovia's shares, which had been down nearly 39% at one point, closed at $8.51.
Traders said that the Wachovia/Citi rumor was making the rounds Friday, but that trading in shares of both Wachovia and Nat City were mostly driven by investor concern that the companies may suffer a similar fate to Washington Mutual Inc. The Seattle thrift company was seized by regulators Thursday, and its banking business was sold to JPMorgan Chase & Co.
Nat City shed nearly 26% — though it had also been down more at one point Friday — to close at $3.45.
"When you look at the two institutions versus Wamu, you make the same assumptions as far as the assets owned by the two banks. A lot of continued writedowns are going to be necessary to get the two banks in good standing," said Joseph C. Morrissey, managing director of bank and thrift stock trading at Boenning & Scattergood Inc. of West Conshohocken, Pa.
Analysts said they do not expect a run on either company, and they saw the drop in their stocks as an opportunity for those willing to take on the risk.
"If either of them have a major bleed of deposits, which I don't think is happening, it will be worrisome," said Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. "I don't think Wachovia should be a $9 stock. It is a risky bet, but anyone who does will be a happy camper."
Friedman, Billings, Ramsey & Co. Inc., which upgraded Nat City's stock to "outperform" Friday, said in a research note that absent a run, the Cleveland company's capital was "more than adequate" to deal with its problem loans. The note also pointed out that the stock experienced a similar drop and subsequent rebound after the IndyMac Bancorp Inc. collapse in July.
JPMorgan Chase rose 11%, and Citi rose 3.8%. Wells gained 9.4% and Santander's shares rose 2.3% in U.S. trading.
"We heard that Wachovia and Citi are at the table," said Michael O'Boyle at Sterne Agee Financial Services Inc.
Mr. Morrissey said that the talks are said to be "preliminary," though Mr. O'Boyle said it may just be a rumor. Citi, Wachovia, Wells and Santander would not comment.
A week ago Wachovia was reportedly in talks with Morgan Stanley about a deal, though those negotiations were said to have ended after Morgan Stanley secured a cash infusion and regulatory approval to become a commercial bank holding company. Morgan Stanley's stock fell 8.7% Friday. The KBW Bank Index rose 2.57% for the day but fell 0.03% for the week. The Standard & Poor's 500 gained 0.33% for the day and 0.5% for the week.