Will Citi Give Goldman A Second Chance?

What a difference a few hours makes. At about 2 p.m., the Dow Jones Industrial Average, which had been down significantly in early trading, turned on its heels and sprinted toward the finish line, finishing up 10 percent, surpassing the 9,000-mark for the first time in a week. (Investors anticipating an interest rate cut and looking for bargain basmement deals were likely responsible for the late push.)

Like the major indices, after early deep dives, both Morgan Stanley and Goldman Sachs finished the day on a positive note: Morgan’s shares were up 10 percent, while Goldman’s were up about 1 percent (indeed, that's what passes for good news these days). But more important, and more interesting, both firms are now the subject of merger rumors—with the big consumer banking franchise Citigroup.

A few days ago, in case you missed it, it was confirmed that just over a month ago, when Goldman CEO Lloyd Blankfein asked Citi CEO Vikram Pandit for his company’s hand in marriage, Pandit gave him the Heisman. But now, some believe Vikram is ready to give Lloyd a second chance, especially since Citi’s Wachovia deal fell through. And, to be sure, Morgan Stanley’s CEO Johnny Mack will not want to be the last bachelor standing on the Street, so if Lloyd's keen on a combo, you can bet that Mack the Knife will be interested in winning Vikram’s hand as well.

The thought of a Goldman-Citi marriage, or Morgan Stanley-Citi pairing, is a wild one, but it makes pretty good sense for both of the firms formerly known as investment banks. It would give them immediate access to billions in deposits that they're now able to hold, and, with Citi's strong equity and fixed income underwriting business, once those businesses get moist again, a combo with either firm will create a franchise that's No. 1 in just about every major investment banking category. And for Citi's part, it badly needs a deal to get back into the game. JPMorgan, Bank of America and Wells Fargo, with their recent acquisitions, are on course to break away from the consumer banking pack in a three-woman race. (I think i have the New York City Marathon on my mind, which is this weekend, November 2nd, and sponsored by ING.) And for his part, Vikram needs to redeem himself after the Wachovia fiasco. So a union in the near future would not be surprising. Imagine the spread at that reception ...