Not many suitors left standing for U.S. banks

NEW YORK (Reuters) - The U.S. Federal Reserve is arranging shotgun weddings for failing financial institutions, but policy makers might find themselves running out of eligible suitors.

The Fed encouraged JPMorgan Chase & Co to take over Bear Stearns Cos Inc, which had experienced a run on the bank. The deal came two months after Bank of America Corp agreed to buy Countrywide Financial Corp, the largest mortgage lender in the U.S. The Fed also encouraged that deal.

With these acquisitions, top U.S. banks are either embroiled in big takeovers or wrestling with credit problems with their own.

International banks have shown little interest in U.S. acquisitions and sovereign wealth funds have already been burned.

"There may be some potential buyers left, but the list is looking pretty thin," said Adam Compton, co-head of global financial stock research at RCM Global Investors.

In the end, the U.S. taxpayer is likely to be on the hook for some extra capital for banks and brokers, analysts said.

The dearth of buyers is likely why Lehman Brothers Holdings Inc's shares fell so much on Monday, ending the day down 19 percent. Some investors fear Lehman will face liquidity problems similar to Bear Stearns'.

Lehman Chief Executive Dick Fuld said in an email sent to reporters that with the Federal Reserve allowing investment banks to borrow directly from the central bank on a secured basis, liquidity concerns are "off the table."

But investors were rattled.

National City Corp, a bank that was reportedly looking to sell itself, fell 43 percent amid concern that there were few buyers, analysts said.

The U.S. government may be increasingly involved in rescuing banks, but foreign governments are likely to be more reluctant to put more money in U.S. financial institutions, after having already lost big on their investments so far.

Since late November, Citigroup has raised more than $15 billion of capital from sovereign wealth funds. But the company's shares have dropped more than a third since the beginning of the year.

Qatar's prime minister, who heads the country's $60 billion sovereign wealth fund, told Reuters last month he would rather invest in European over U.S. lenders because U.S. bank stocks were likely to fall further on subprime-mortgage writedowns.

Bear Stearns' fire sale does not help.

"This type of an episode should send those entities running for the hills at the moment," said Tad Rivelle, chief investment officer at Metropolitan West Asset Management in Los Angeles.

FALLING CHAINSAW

European banks are also unlikely to take the bait, bankers said.

"This is about catching a falling chainsaw," one banker said.

Santander, Europe's No. 2 bank, has been burned already on one U.S. foray, having written down part of its stake in U.S. lender Sovereign last month. Santander's chairman said on Friday that he had been approached to take over other banks but was holding off on acquisition plans.

Among the largest U.S. banks, JPMorgan and Bank of America are wrestling with acquisitions, Citigroup is facing big writedowns, and Wachovia Corp is still swallowing acquisitions of mortgage lender Golden West Corp and brokerage A.G. Edwards Inc. made over the last 18 months.

Even venerable Goldman Sachs might not be doing an acquisition, as it has not been totally immune to the credit crisis. Its shares have fallen 30 percent so far this year.

There may be fewer suppliers of capital now, but there will likely still be a need for it. The housing crisis has triggered more than $200 billion of writedowns at banks globally, with U.S. banks taking the biggest hit.

But the crisis is far from over, and U.S. commercial and investment banks are expected to take big writedowns in the coming quarters, as market values for assets ranging from commercial mortgages to credit card bonds decline.

Writedowns are painful for banks, whose business model is to borrow most of their capital. Lehman Brothers Holdings Inc has just $22.5 billion of equity supporting about $690 billion of assets. The rest was in one form or another borrowed.

"I would not bet today that today is the bottom on financial stocks," RCM's Compton said.

(Additional reporting by Steve Slater in London, Jane Barrett in Madrid, Michael Flaherty in Hong Kong, and Paritosh Bansal in New York)

(Editing by Leslie Gevirtz)