Twenty-four hours after Washington Mutual was rescued by JPMorgan Chase, it emerged last night that Wachovia, America’s fourth-biggest retail bank, was in merger talks.

At least three others banks - Citigroup, Wells Fargo and Banco Santander, of Spain - are involved, although the discussions are at an early stage and there is no guarantee that a deal will result.

On Thursday evening, Washington Mutual became the biggest bank to fail in American history, yet another low point in a fortnight that ranks as the most turbulent since the Wall Street crash of 1929.

Wachovia has a very similar loan book to Washington Mutual. Both have sold home loans called adjustable rate mortgages, which have experienced a high default rate because many borrowers have been unable to keep pace with rising monthly repayments.

Some of these mortgages also have an option that allows borrowers to take payment holidays and roll the amount owed back into the total value of the loan, increasing the risk to the lender. It is estimated that Wachovia is struggling to cope with about $120 billion (£66 billion) worth of such home loans.

Although Wachovia has been under extreme pressure to find a merger partner as it struggled to cope with the stress on its loan book, the bank remains an attractive bid target. It is widely known as one of the most respectable retail banking franchises in the United States.

Each of Wachovia’s suitors had combed through the accounts of Washington Mutual when it was on the auction block, and it is expected that banking executives will meet in New York this weekend to discuss a Wachovia takeover. Wachovia has also been in recent merger talks with Morgan Stanley, but the investment bank’s conversion to become a traditional bank is believed to have brushed those talks aside.

Wachovia boasts a very strong retail banking management team. Moreover, large retail banking businesses are perceived as highly attractive and stable amid the turmoil in America’s banking system: at the end of June this year, Wachovia, which is based in Charlotte, North Carolina, had retail deposits of $448 billion.

Last night, shares in Wachovia, which had been trading as low as $8, shot up to $10 in the last two minutes of trading after news of the talks broke. The shares continued to trade around that level after the closing bell. Even with the jump, Wachovia’s shares were still down 27 per cent for the session. They had fallen by 78 per cent this year before yesterday’s trading.

The most recent problems on Wall Street were sparked by the collapse of Lehman Brothers after the US Government refused to bail it out. As a result, Barclays took over the equities and mergers and advisory divisions of the US bank. Other arms of the business have been looked at by prospective purchasers, including Nomura, but a move by the Japanese securities group to buy the fixed-income division in London has fallen through at the last moment, throwing 600 British jobs into doubt.

Hopes that Nomura would snap up the division evaporated yesterday when a 4pm deadline passed with no offer being made to administrators at PricewaterhouseCoopers (PwC). Nomura declined to comment but it is thought that despite being able to buy the business for a peppercorn sum, it pulled out because of the considerable capital backing that it would have required. Nomura bought Lehman’s equities and investment banking units in London this week, potentially saving more than 2,000 jobs.

There were conflicting reports last night over whether any other bidder was interested in the fixed-income division. Stars in the division were already starting to vote with their feet, with a team of seven in interest rate sales, led by Cedric Pauwels, defecting to Citigroup yesterday.

Up to 2,000 Lehman jobs in London are not yet secure. PwC is still trying to find buyers for Lehman Brothers Asset Management (Europe), the fund managment unit.

The political wrangling in America over the proposed $700 billion bailout of Wall Street sent shares down in morning trading in New York. The FTSE 100 caught the mood and finished 109 points lower at 5,088. In New York, as hopes rose of a deal being reached over the weekend and as news of the Wachovia talks spread, the Dow Jones industrial average recovered to close 121.10 points up at 11,143.10. The S&P 500 index ended the day 4.05 up at 1,213.25.

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