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.