As soon as Washington Mutual (NYSE: WM) evaporated, the natural question was: "Who's next?" And after its stock plunged 38% during the day, it now looks like the next one to go will be Wachovia (NYSE: WB). This time the buyer could be Citigroup (NYSE: C),

With $120 billion in adjustable rate mortgages (ARMs) it got through its Golden West Financial acquisition, Wachovia is particularly vulnerable to the capital-eroding impact of a drop in their value. But if Citi bought Wachovia, it would get a stronger presence on the East Coast and its well-regarded retail banking management.

Citi is not the only firm to talk merger with Wachovia -- prior to its decision to turn itself into a bank holding company (BHC) on Sunday, Morgan Stanley (NYSE: MS) was in merger discussions with Wachovia. I just wonder how any deal could be struck with Wachovia that would not involve those nasty ARMs. And if those ARMs are involved in a deal, how can the acquirer avoid those nasty digestion problems that have sent Wachovia shares into a dive.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

In what I feared might become a regular feature here, the Federal Deposit Insurance Corporation (FDIC) arranged for the takeover of the 13th failed bank of 2008 Thursday. As I posted, the FDIC likes to close banks on Friday after hours so it can reopen as branches of the acquiring bank on the following Monday morning. But since this is history's biggest bank failure, the FDIC couldn't wait for the weekend. The bank in question is the $310 billion (assets) Washington Mutual (NYSE: WM).

This is history's biggest bank failure -- it's almost eight times bigger than the previous record holder, Continental Illinois. In this case, JPMorgan Chase (NYSE: JPM) was the rescuer, buying WaMu from the FDIC. This follows JPMorgan's purchase of Bear Stearns back in March in which the Federal Reserve provided a $29 billion loan. But this deal will cost JPMorgan far less -- a mere $1.9 billion, and it will write down WaMu's loan portfolio by 10% in the process. To further bolster its position, JPMorgan will raise $8 billion in capital.

What does JPMorgan get for all this? Branches for one thing -- 5,400 in 23 states -- and it will shutter 10% of the combined branches. What JPMorgan does not get is much of the junk that WaMu carried and by that I refer to "senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, any assets or liabilities of the holding company, Washington Mutual Inc.; or [WaMu's] lawsuits."

In an enormous and startling turn of events, the Federal Deposit Insurance Corp. has taken over Washington Mutual (NYSE: WM), forcing it into an arranged marriage. According to reports in the Wall Street Journal, the FDIC reached out to the nation's biggest banks, asking them to make an offer. JPMorgan Chase (NYSE: JPM) was the one to step up to the plate, taking over the bank's deposits and branches. The value of the deal, and the fate of the bad assets, isn't currently known; but equityholders and senior debt holders will be wiped out.

Depositors leery of the bank's failure were part of the problem; $16.7 billion in deposits have been taken out of the bank since September 15. According to the WSJ, the FDIC fund won't be affected by the takeover.

TheStreet.com's Jim Cramer says there are some events out there -- WaMu being the biggest -- that make the plan worth adopting.

The vote from Monday's market was pretty resounding: The plan won't help. Or if it does, it will be too costly and there are too many details that can't be worked out.

So should it just be let go?

I am a big believer in the plan because there are some events out there that would make the plan worth adopting no matter what. And the biggest event is Washington Mutual (NYSE: WM) (Cramer's Take). Here's a firm that just had its debt downgraded again last night, and if you read the ratings downgrades you can't see how the feds can avoid seizing it.

But what happens when they seize it? The thing is so mammoth that it would overwhelm the FDIC. Although with this administration's magic-wand philosophy, maybe we can just get some stopgap funding. Or maybe we just say, "As long as there are no lines outside WM, we are fine." But at a certain point, no investors are going to want to buy any of this company's debt and the losses could be too great.

The San Francisco Chronicle reports that not only is Wells Fargo & Co. (NYSE: WFC) surviving the chaos on Wall Street, but it just may be thriving. About the only reason that Wells Fargo has been in the news recently is as a potential buyer of Washington Mutual (NYSE: WM). In fact, as markets tumbled early in the week, Wells Fargo shares reached a new 52-week high of $44.69.

Industry observers say that Wells Fargo's stability is a consequence of its limited exposure to failing mortgages, particularly of the subprime variety. It hasn't escaped unscathed, however. It said it would take charges in the third quarter related to investments in Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and Lehman Brothers, but much less than those taken by rivals Wachovia (NYSE: WB) and Washington Mutual.

Wells Fargo has been selectively acquiring assets, mostly in the western U.S., during the economic woes, and is expected to continue to do so. Chairman and former CEO, Richard Kovacevich, is rumored to me looking for one more deal before he retires later this year, according to Reuters. But both Wells Fargo and Washington Mutual have declined to comment on a possible deal. "There's going to be a lot of mergers and acquisitions for either good reasons or because people don't have choices," said Kovacevich, pointing out that Wells Fargo is not the only lender looking to buy.

Wells Fargo shares closed Friday at $39.80 and are up 31.8% year to date. Analysts surveyed by First Call recommend holding Wells Fargo.

Citigroup (NYSE: C) is considering buying Washington Mutual (NYSE: WM), the nation's largest savings and loan. It sounds like Sandy Weill is back in charge and trying to create the kind of financial conglomerate he built in the 1990s and earlier this decade.

According to The Wall Street Journal, "Citigroup and several other banks are reviewing the Seattle thrift holding company's books, which are packed with shaky mortgages."

Just a few months ago, Citi CEO Vikram Pandit was talking about cutting the big bank's expenses by 20% and selling off "non-core" assets. Now he is thinking about buying the most troubled large financial company in America.

Pandit would be better off staying with his first plan. There is a reason WaMu's stock got down to under $2. If mortgage defaults move up and housing prices move down, the mortgage company's financial situation could get much worse.

Pandit is proving to be a "flavor-of-the-month" CEO. Investors never know what he plans to do tomorrow, let alone what he wants to do with Citi over the next year.

Douglas A. McIntyre is an editor at 247wallst.com

Now that a mass of mortgage-related write-downs has swamped major financial companies, Wall Street has turned its attention to the second half of the year to see whether the beatings will continue. Early indications are that they will. Both Lehman Brothers (NYSE: LEH) and Washington Mutual (NYSE: WM) have said they will take reserves for several billion in their third quarters.

The bank that has been hit hardest by the crisis may not even be American. Reuters reports that UBS (NYSE: UBS) will have to write down another $5 billion on its risky investments in the second half of the year according to the Sonntags Zeitung newspaper.

The IMF has predicted that total write-downs driven by the mortgage crisis will hit over $1 trillion. Only about half of that has hit the markets so far. If banks face a tremendous increase in reported losses, most will have to raise money which will cause another round of dilution.

Bank and brokerage stock prices are going much lower.

Douglas A. McIntyre is an editor at 247wallst.com.

Here are some highlights from this past week's earnings coverage from BloggingStocks:

• America's Car-Mart Inc. (NASDAQ: CRMT) topped Q1 expectations on strong growth of same-store sales.
• Campbell Soup Co. (NYSE: CPB) strong Q4 results led shares to a new 52-week high.
• FedEx Corp. (NYSE: FDX) boosted its Q1 forecast due to the recent drop in oil prices.
• Krispy Kreme Doughnuts (NYSE: KKD) narrowed its loss in Q2 but fell short of expectations.
• Lehman Brothers Holdings Inc. (NYSE: LEH) released Q3 results early to calm investor concerns.
• PharmaNet Development Group Inc. (NASDAQ: PDGI) was downgraded after lowering its guidance.
• Shuffle Master Inc. (NASDAQ: SHFL) fell short of analysts estimates, reporting flat year over year earnings.
• Texas Instruments Inc. (NYSE: TXN) reaffirmed its outlook when investors had expected a cut.
• Ulta Salon Cosmetics & Fragrance Inc. (NASDAQ: ULTA) beat estimates and offered Q3 and full-year outlook.
• Washington Mutual Inc. (NYSE: WM) was upgraded despite its disappointing Q3 results.

Upcoming quarterly reports include Kroger (NYSE: KR), Adobe (NASDAQ: ADBE), Best Buy (NYSE: BBY), Goldman Sachs (NYSE: GS), General Mills (NYSE: GIS), Morgan Stanley (NYSE: MS), ConAgra (NYSE: CAG), FedEx (NYSE: FDX), and Oracle (NASDAQ: ORCL).

Visit AOL Money & Finance for more earnings coverage.

So what's an investor to think? Last Friday I seemed clever buying Washington Mutual (NYSE: WM) on a dip (Chasing Value: Are you watching WaMu?) only to be crushed a few days later when Meridian Capital's Alan Fishman CEO, was announced as Kerry Killinger's replacement and bad news about Lehman Br Holdings (NYSE: LEH) became cement shoes around WaMu's feet all week.

Yesterday I stood by Friday's rationale, but took the hit for the down stock on the unknown cash-flow issues based on Wall Street's questioning WaMu's potential difficulty funding ongoing operations until it returned to profitability. See: Chasing Value: Not -- WaMu one week later - ouch!

By the end of the day the stock was up 21% as Washington Mutual tried to soothe anxiety. It backed up it's claim of stability by challenging the rating agencies to look over its books so that they could verify that WM currently had liquidity levels in excess of regulator requirements, and that it should not have a problem maintaining operations based on current levels of capital. Nevertheless, all the ratings agencies downgraded the company.

No sooner did I post about Washington Mutual (NYSE: WM) last Friday (Chasing Value: Are you watching WaMu?) and buy it, I was undercut by the announcement of a change at the top.

The news just two days later read: Washington Mutual Will Name Meridian Capital's Alan Fishman CEO, WSJ Says.

I have made some bad picks and had some bad timing but this must be the biggest blunder so far.

This morning I received the following comment to last Friday's post:

• Mike said; Ya, Wamu... Great stock. Ha Ha Ha Ha Ha Ha Ha Ha Ha Ha

So I cannot hide from the truth and while their are brighter stock pickers on the Web then I, at least I can try to maintain the highest level of integrity. It is not so much that my commentary last Friday was unfounded or untrue, but that it appears from Wall Streets perspective to be another case of Washington Mutual doing 'too little too late'. That clearly is also the opinion of the WaMu Board because the ouster of WaMu CEO Kerry Killinger is part of that story.

Mr. Killinger was apparently very quick to promote questionable lending practices and very slow to admit his blunders and take corrective action. While the bank may have many positive attributes, if it does not have the cash to survive the current industry and internal difficulties then as many think it will not survive in it's current form. I hope not to make the same mistake and that is part of why I feel it is important to admit my errors responsibly and to also provide readers a forum to express their thoughts.

This morning there is plenty of banter about the company searching for a buyer, another idea Killinger resisted earlier in the year. Now whatever happens he will not be a part of the decision.

Last Friday WaMu closed at $4.27. It is trading $2.14, down $0.18 as of 11:55 AM EDT.

FINAL UPDATE: closed today at $2.83, up $0.51 or 21.98% -- go figure?

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of WM.

For several years I held Washington Mutual (NYSE: WM) stock, happy with some slow growth and a very sizable dividend yield. It was so stable for so long that I and others included it in our 'safe havens' selections. This eventually turned into a disaster with the collapse of the financial sector and WaMu along with it.

There is quite a lot of debate as to whether it is time to get back into financial stocks or if we are in for years of more torment in the sector. The bad news and write-downs certainly have not abated recently.

My colleague Zac Bissonnette posted Value investors leap out of financials: sign of a bottom? raising the issue of capitulation by those who might have been hanging on to a shred of hope for a turnaround. Now they are taking their losses. Perhaps they will take advantage of the 30-day rule and get back in next month after booking the losses.

It has been five weeks since I posted Serious Money: Tempting fate with 10 financials. The results of buying into the following pool of financial stocks at a time when the "hate 'em" factor was at a peak has been tremendous. The over all return has has been 26.3% with eight stocks up and two down.

For investors this might have been too speculative; for traders, they are probably grinning from ear to ear. For me -- we will see where we stand next year. As one of my colleagues reminded me, this is the real test, although I think there is reason for optimism.

The leader of the pack was MBIA Inc (NYSE: MBI), up 228%. In the absence of that gain the appreciation would have only been 3.5%. That beats all the indices but is not as dramatic.

• Citigroup Inc. (NYSE: C) -- $18.45 down 63% from its 52 week high of $49.90; closed yesterday at $19.11, UP 3.57%
  
• Lehman Br Holdings (NYSE: LEH) -- $16.88 down 75% from its 52 week high of $67.73; closed yesterday at $16.13, down 4.44%
• Merrill Lynch (NYSE: MER) -- $26.25 down 67% from its 52 week high of $79.72; closed yesterday at $27.75, UP 5.7%.
• MBIA Inc (NYSE: MBI) -- $4.92 down 93% from its 52 week high of $68.98; closed yesterday at $16.14, UP 228%.
• E*TRADE (NASDAQ: ETFC) -- $3.06 down 84% from its 52 week high of $19.39; closed yesterday at $3.25, UP 6.2.
• East West Bancorp (NASDAQ: EWBC) -- $12.46 down 67% from its 52 week high of $20.88; closed yesterday at $13.01, UP 4.4%.
• Gramercy Capital (NYSE: GKK) -- $6.72 down 77% from its 52 week high of $29.45; closed yesterday at $6.80, UP 1.2%.
• Newcastle Investment (NYSE: NCT) -- $5.88 down 72% from its 52 week high of $20.88; closed yesterday at $6.89, UP 17.18%.
• Wachovia Corp. (NYSE: WB) -- $15.70 down 70% from its 52 week high of $53.10; closed yesterday at $16.65, UP 6%.
• Washington Mutual (NYSE: WM) -- $4.43 down 89% from its 52 week high of $39.48; closed yesterday at $4.24, down 4.29%

In my original post I emphasized that you had to buy the pool for safety. During the last month, we have seen many stories about Lehman Brothers' demise or the collapse of a major bank like WaMu or Wachovia, and if that had happened the gains in MBIA would have made up for the total and complete collapse of any one of them. I have no reason to believe this is immanent. I do have reason to believe the opposite. During the last month I bought additional shares of WaMu, one of the two down stocks at $3.50 per share.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of MBI, NCT & WM.

The stock market was down yesterday and it is down again today. Bearish sentiment is roaming through Wall Street right now, so I thought I would look back on another occasion when the market was going through similar turmoil and I wrote about the following eight stocks, which I thought would be "safe havens" in such a storm.

Six of the eight did well and two did not, and of course one of those two was a disaster. Among the losers, I do not think anyone is fretting about UPS, which is still one of the few triple-A rated companies along with Berkshire Hathaway. It has been well reported that the slowing economy and higher fuel prices have been the major culprits affecting UPS's earnings. In the case of WaMu, it's demise has also been well reported, but at the time I recommended it WaMu had a stellar reputation of growth and high yield for over two decades. There is no hiding, it turned out to be a lousy pick and an ANTI-SAFE Haven

NOT SAFE:

United Parcel Service (NYSE: UPS) closed Monday at $65.30 down from $78.40; a 16.71% loss

Washington Mutual (NYSE: WM) closed Monday at $4.21 down from $45.50; a 98% loss.

Fortunately the remaining six picks have done very, very well. If you had bought the pool, the average gain over the last two years would have been 7.14%. Adding the dividends over the two years would have raised this to 13.14%.

Yesterday the Dow Jones Industrial Average was down 225, so I decided to peg the financial stocks I wrote about investing in as a pool. We are often accused of bragging on the good days and having memory loss on the bad so I wanted to be transparent and forthright on the downside.

To my surprise the financial stock pool is actually up 9.96% on average. Six stocks increased in value, two were down and two stocks were even money. The big winner was MBIA Inc (NYSE: MBI) up over 68%!

In the same time frame the DJIA has gone from 11,397.56 to 11,431.43 (even) and the S&P has gone from 1263.2 to 1266.06 last night, for basically no change either.

The market is rebounding as I write so I expect the news is even better. Although, this pool of stocks beat the market so far in the short run, I hope to track this group for a year, or at least until Major League Baseball's spring training opens in 2009.

If you want to track the story with me the first post was Serious Money: 10 finance stocks as the market bounces. I remain stubbornly optimistic that this is a buying opportunity and investors will be sorry they did not have the courage to buy stocks when they were hated. The follow-up was Serious Money: Tempting fate with 10 financials

The initial prices are as of July 29, 2008.

Oh, happy day. Mortgages issued in the first half of 2007 are going bad at a rate much faster than those issued in 2006. According to The Wall Street Journal, data from the "Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months."

The news means that earnings could get worse at large banks that have mortgage loans at the center of their businesses. Wachovia (NYSE: WB) and Washington Mutual (NYSE: WM) come to mind. That should be especially interesting for investors in the two companies. Over the last month, both stocks have recovered. Washington Mutual is up about 2% and Wachovia has risen a remarkable 30%.

Wall Street had hoped that bank stocks, especially those with businesses focused on the mortgage markets, would improve as subprime loans worked their way through the system. That may have worked if prime mortgages weren't going bad at an increasing rate these days and loans from 2007 didn't appear to present more risk than those from earlier periods.

All of that is to say that a stock like Wachovia, which fell as low as $7.80 and then recovered to $18.41, is not out of the woods. As a matter of fact, it may be heading back in.

Douglas A. McIntyre is an editor at 24/7 Wall St.