NEW YORK ( TheStreet) -- Mergers and politics dominated the headlines in the financial services industry this week as the midterm elections promise to upset the banking-regulation applecart and a new round of mergers in the trust bank space added to industry drama.

Later in the week, banks stocks were boosted by a report that the Federal Reserve may allow larger, well capitalized banks to begin upping their dividends.

On Monday, M&T Bank ( MTB) agreed to acquire Wilmington Trust ( WL) in a stock-for-stock transaction valued at about $351 million.

The transaction rings in at half of the bank's market value last week, with investors getting 0.051372 shares of M&T for each Wilmington share they own. Management described the deal as "painful and difficult" on their third earnings conference call. One class action firm is investigating whether or not Wilmington Trust was properly shopped.

Trust Banks Set for Mergers

Separately, Ambac Financial Group ( ABK) is in talks with senior creditors to file a prepackaged bankruptcy, according to a Securities and Exchange Commission filing. The company warned the board that it will not make an interest payment on the company's debt due November 15. As of June 30, 2010, Ambac had debt of $1,622 million.

Goldman Sachs said the largest U.S. banks face "potential losses of $26 billion spread across several years" as they are forced to buy back securitized mortgages or take other credit losses on loans going through the foreclosure process.

Between JPMorgan Chase's ( JPM) release of third-quarter earnings results on October 13 and Wells Fargo's ( WFC) third-quarter release on August 20, the largest four banks - which also include Citigroup ( C) and Bank of America ( BAC) -- lost $28 billion in market capitalization, according to the report.

Tuesday's midterm election could mean major changes in the mortgage and housing markets. The House Financial Services Committee current chairman, Rep. Barney Frank (D., Mass.), will no longer be in the majority.

Frank's likely successor as chairman, Rep. Spencer Bachus (R., Ala.), has been a harsh critic of bailouts and housing-finance policy.
Spencer Bachus, Republican of Alabama
Spencer Bachus, Republican of Alabama

In recent months, Bachus has also become a tough critic of Fannie Mae and Freddie Mac - pledging to shut them down, asking for investigations into their practices and railing against their continued receipt of taxpayer funds. Bachus also voted against the Dodd-Frank financial reform bill, saying: "This is not real reform."

Uncle Sam is relenting on some bank demands to allow them to start paying dividends. The Fed is expected to allow strong banks to up their dividend payments, The Wall Street Journal reported Thursday.

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