Ah, yes -- this, too shall pass. The tides ebb and flow. Bubbles burst. People who lend money to people who can't pay it back go out of business. Risk-takers pay the price. Free markets work … primarily, and most of the time. We'll get over this.

But until then, every day is filled with more financial folly than you can shake a stick at. It's as if banks are lining up on an escalator that unloads at the edge of a cliff; as soon as one falls, the next in line becomes the crisis du jour.

The latest punching bags? Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Washington Mutual (NYSE:WM), and Wachovia (NYSE:WB). And, boy, do we have some exciting developments to report. Here's the latest.

Merger in the making
Less than 24 hours after Morgan Stanley's CFO said he was "very confident" in his company's ability to survive in its current form, one of Wall Street's remaining survivors seems to have changed its mind. Morgan Stanley is in preliminary merger talks with Wachovia, among other banks.

Combining the companies would solidify Morgan's balance sheet with bank deposits, rather than being reliant on short-term financing from global financial markets that are more edgy than a chihuahua on Red Bull laced with NoDoz. Bank deposits are a more stable source of capital, since they're insured by the FDIC -- having that assurance helps prevent bank runs. And, yes, it is bank runs that are pounding markets right now: bank runs by hedge funds, pension funds, and other investors who simply don't know the fate of these brokerage firms.

I have a feeling we'll see Goldman Sachs announce a similar move in the near future. And thank goodness: If there's one thing that could actually form a floor in this financial mess, having the remaining independent investment banks team up with commercial banks might be it. Cross your fingers.

WaMu on the block
After days of speculation by investors, the government is now actively seeking a new home for Washington Mutual. WaMu has hired Goldman Sachs to help find a possible suitor, with Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and HSBC being mentioned as possible buyers. The Wall Street Journal also reports Citigroup (NYSE:C) had shown interest, but that deal seems unlikely. Citi's already in a world of hurt as it is -- it's a little nuts to be bargain-hunting when your stock is down 70% in the last year.

One big hurdle was cleared yesterday as private-equity firm and huge WaMu investor TPG waved its right to compensation in the event WaMu raises capital below the level at which TPG invested -- basically, a provision that guaranteed TPG's investment wouldn't be diluted. With that hindrance out of the way, it's now easier for WaMu to raise capital if need be. But, come on, with WaMu's stock selling at around $2, it's comical to think about raising capital anytime soon.

A few thoughts on this unprecedented mess
I don't mean to overstate the obvious, but markets are completely infested by fear and panic right now. Morgan Stanley is nowhere near what most people would consider bankrupt, but it might not survive unless the global investors it relies on start to calm down. Bear Stearns, Lehman Brothers, AIG … they had it coming for them. But now we're entering a phase where even rock-solid banks like Morgan Stanley and Goldman are facing legitimate crises not over losses on their books, but over losses of confidence from the financial system. It's a whole new chapter in this year-long mess we've experienced.

Take that any way you wish: In almost every episode of financial turmoil in the past, panic selling opened the door for extraordinary buying opportunities. But here's an important thought for investors to remember: There's no indication that things have bottomed out, or will bottom out anytime soon. While, true, the ultimate buying opportunity comes at the point of maximum pessimism, that's not to say that all pessimism is unwarranted. If you're thinking of dipping your toes into financial stocks right now trying to catch the bottom, may I recommend Las Vegas? You'll get free drinks and you get to stare at flashy lights for taking on the same amount of risk.

For more on this week's parade of events, check out “The Biggest Financial Story of the Past 50 Years.” And, please, don't panic. The sun will rise over the stock market again someday.  

For related Foolishness:

Fool contributor Morgan Housel doesn’t own shares in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.