RPT-WRAPUP 15-U.S. works on bank debt plan, U.K. targets shorts

BOUNCE BACK

Some other talks that could lead to further massive consolidation of the banking sector continued on Thursday.

Washington Mutual Inc (WM.N), the large U.S. savings and loan beleaguered by mortgage losses, continues to explore all options, such as talking to potential buyers or raising capital, sources familiar with the situation said on Thursday.

Still, news it has yet to secure a quick takeover bid led to the loss of some of its earlier gains in after-hours trading.

Potential suitors such as JP Morgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) have yet to submit formal offers, although negotiations are continuing with several parties that have expressed interest, sources said. In addition to JP Morgan and Wells Fargo, possible suitors include HSBC Holdings Plc (HSBA.L) and Citigroup Inc (C.N), a source familiar with the situation previously told Reuters.

The global banking sector has been plagued by hundreds of billions of dollars of mortgage-related debt that is worth much less than its original value because of the impact of the U.S. housing bust and the subsequent credit crisis.

In recent weeks, the government has stepped in to rescue three massive financial institutions: American International Group Inc (AIG.N), Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

The response from authorities to the crisis had done little to restore confidence to global stock markets until news of the short selling crackdown and the possible bailout fund on Thursday. The Dow Jones industrial average .DJI, which fell as much as 150 points at one point, closed up 410 points.

Beaten down banking shares like Wachovia and Washington Mutual flipped from massive losses to gains of 59 percent and 49 percent, respectively.

However, shares of major trust banks slid on concern about the level of fund outflows, with State Street Corp (STT.N) closed down 9 percent, leading the decline, after tumbling 55 percent at one point.

The funds industry has been on edge since the asset value of one of the oldest and biggest U.S. money market funds on Tuesday slid below the amount investors had put into it -- commonly known as "breaking the buck."

"We are seeing a ton of panic," said Conrad Gann, president of TrimTabs Investment Research, which tracks money flowing into and out of mutual funds. "It's not just the retail investors who are scared. It is the pros who are scared."

The Wall Street Journal reported that the U.S. government may create insurance for money-market mutual funds, similar to the insurance that now governs bank deposits.

'I AM WATCHING'

U.S. authorities have already pledged $900 billion to prop up the financial system and housing market [ID:nN161263].

The UK ban on short selling came after the U.S. Securities and Exchange Commission introduced rules under which short sellers and broker-dealers must deliver stock by the end of business on settlement day, three days after the sale.

Morgan Stanley boss John Mack told employees at a town meeting he thought U.S. regulators were starting to understand the systemic risk posed by short sellers.

Cuomo put short sellers on notice. "I want the short-sellers to know today that I am watching," he said.

In a sign of the growing blame game arising from the crisis, Republican presidential hopeful Sen. John McCain called for the resignation of the SEC's Cox, a fellow Republican.

In his first remarks about the crisis since the government's $85 billion takeover of AIG earlier this week, President George W. Bush expressed concern about the turmoil, and said his administration was prepared to take further measures to strengthen and stabilize markets.

"The American people are concerned about the situation in our financial markets and our economy, and I share their concerns," he told reporters.

Earlier, the U.S. Federal Reserve announced coordinated moves with five of the world's major central banks to inject up to $180 billion in liquidity into global money markets.

That gave some reassurance to panicked investors, and slashed overnight money rates to 2 percent from 8.5 percent.

As an indication of the demand for liquidity, the Bank of England said it received bids of 202 billion pounds ($365 billion) for the 66 billion pounds on offer in its weekly open market operation.

British bank Lloyds TSB Group Plc (LLOY.L) took advantage of the market turmoil to achieve a long-held ambition by scooping up the country's biggest mortgage lender, HBOS Plc HBOS.L, in a $22 billion all-share deal.

HBOS shares, which had slumped due to fears about its funding, soared 40 percent, and the British government promised to rewrite competition laws to let the deal go through. ($1=.5612 pound) (Additional reporting by Joseph A. Giannone, Steve Johnson and Richard Leong, Muralikumar Anantharaman, Rachelle Younglai, Emily Chasan in the U.S., Writing by Martin Howell; Editing by Gary Hill & Ian Geoghegan)