Two European financial firms fell apart during the last 24 hours. The U.K. government said that mortgage bank Bradford & Bingley is being nationalized after investors and lenders lost confidence in the group. B&B’s stock market listing was canceled. Investors got nothing.

Belgian banking and insurance group Fortis received an 11.2 billion euro ($16.37 billion) injection from the Netherlands, Belgium, and Luxembourg. It would have failed without the capital.

In the US, Wachovia (WB) has begun negotiations with Citigroup (C) and Wells Fargo (WFC) to sell all or parts of its operations. The New York Times says that the buyout conversations are active.

In the European cases, potential buyers walked away because the finances of Fortis and B&B were so severely damaged that no other financial company would take them on. With Wachovia, other banks may wait until its assets can he bought at fire sale prices. The examples of Bear Stearns and Washington Mutual have given strong companies an idea of how little they can pay for potentially valuable properties.The credit crisis has perverted the process of valuing assets.

If Wachovia does collapse on the back of the trouble in Europe, it will show that the congressional bill to put $700 billion into the banking system has done little to raise liquidity to the level where weak institutions can survive even with a government program to help them unload toxic assets. If customers continue to pull capital out of troubled financial firms, getting money in exchange for impaired paper will not be sufficient to keep Wachovia from floundering.

The bailout has not even passed Congress and its limitations are already painfully obvious. Wachovia should, in theory, be able to use access to the Treasury fund to pull itself out of a flat spin. The government measure should give the bank’s depositors and investors some degree of comfort. If Wachovia cannot stand on its own two feet this week, it will be powerful evidence that the credit crisis has begun to burn territory well beyond the ability of the government to build all but the most modest firewalls.

It will be an early and unmistakable sign that the $700 billion bailout is not nearly enough.

Douglas A. McIntyre

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