Banks rush to do deals as crisis deepens

By Jack Reerink

NEW YORK (Reuters) - Wall Street's manic dealmaking reached a new pitch on Wednesday as U.S. share prices plummeted to three-year lows and forced increasingly desperate major banks to scramble for merger partners.

With the financial landscape undergoing its most dramatic transformation since the Great Depression, reports emerged of takeovers involving No. 2 U.S. investment bank Morgan Stanley, weakened top U.S. savings bank Washington Mutual and major UK mortgage lender HBOS.

"This is indicative of the changes that are shaking the foundation of the financial system in today's world," said Frank Husic, Managing Partner of Husic Capital Management in San Francisco.

The flurry of potential deals followed the surprise $85 billion (47 billion pound) rescue of insurer American International Group by the U.S. Federal Reserve on Tuesday that did little to calm investors' nerves.

"Stop The Insanity," pleaded a research note from Swiss bank UBS as U.S. financial shares appeared to be in free-fall. The U.S. stock market plunged 4.7 percent to a three-year low, the dollar slumped, while safe-haven U.S. Treasury bonds and gold soared.

The AIG rescue capped a week of bailouts, a bankruptcy on Wall Street and moves by central banks around the world to flood the financial system with funds to prevent it from seizing up.

The result: a seismic shift in the financial industry, with some of Wall Street's biggest names disappearing.

"The fear is who is next," said John O'Brien, senior vice president at MKM Partners in Cleveland. "It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear."