Wedding Bells for Goldman and Citigroup?

Bear Stearns. Lehman Brothers. AIG (NYSE: AIG  ) . Fannie Mae. Freddie Mac.

They all failed. Or came darn close to it.

No one knows, but we can at least hope the days of colossal failures are over … "hope" being the key word there. The next step for the financial industry looks as though it'll be massive consolidation.

The latest consolidation rumor? Goldman Sachs (NYSE: GS  ) and Citigroup (NYSE: C  ) .

Again, let's highlight the word "rumor" -- there's nothing official yet. The Wall Street Journal reports that Goldman CEO Lloyd Blankfein talked to Citi CEO Vikram Pandit in September to discuss a possible merger. The talk apparently went down not long after Lehman Brothers went belly-up -- a time when Goldman and rival Morgan Stanley (NYSE: MS  ) , then the last independent Wall Street banks, appeared to be about to run down the same path Lehman took, unless they found partners.

Since that disastrous week, both Goldman and Morgan Stanley have gained approval to switch to bank holding companies, which means they'll be allowed to accept customer deposits. As a result, both will probably either find a commercial-banking partner or start their own banking operations, the latter likely being leaps-and-bounds harder than the former.

No one knows exactly what these guys have up their sleeves, but it seems pretty likely that Goldman and Morgan Stanley will end up merging with a commercial bank in the not-so distant future. Even more important, Citigroup is in absolute tatters and could desperately use a little boost itself. After losing the battle for Wachovia (NYSE: WB  ) to Wells Fargo (NYSE: WFC  ) , it's likely to have remained on most people's short list of beleaguered banks. Pair it up with Goldman, and suddenly Citigroup's attached to one of the strongest financial companies in the world -- one that even Warren Buffett has put his confidence behind.

If a deal were to go down, one obvious question is how common shareholders would be dealt with. With Citi shares down 70% in the past year and 40% in the past month, any deal that comes with even a slight premium is bound to be greeted with elation. Goldman shareholders would probably breathe a sigh of relief knowing their company will be teamed up with a stable deposit base, free of the chains imposed by short-term funding markets that remain in flux.

Should be interesting to see what happens.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


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