Credit Mess Weighs on Banks

With more than 50% of its revenue generated from abroad, Merrill appears to be in a position to weather the considerable storm brewing in mortgages and credit with its international operations. Still, it is possible that the storied franchise, at a market capitalization in the ballpark of $46 billion, may have to go into eat-or-be-eaten mode. It would not be inconceivable for the firm to find an international ally willing to provide more than just cash or a domestic company such as Wachovia(WB Quote - Cramer on WB - Stock Picks) -- a financial firm that O'Neal reportedly had attempted to woo once before -- with which it could team up.

Domestic partnerships and international hookups are likely to be a key component of the recovery story for other financial firms as well. But it remains hard to determine which franchises are viewed as healthy in the coming year as firms that became bloated off of the business of originating, packaging and selling mortgages scale back significantly, if not entirely.

Peter Goldman, portfolio manager at Chicago Asset Management, believes the next few years could be a recovery period for many firms marked by a back-to-basics approach to generating profits, assuming that the market activity isn't further dampened by a U.S. economic recession. Chicago Asset holds long positions, via various investment funds, in Morgan Stanley, Citi and Bear.

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