Who's Next?

Wall Street has become the Lord of the Flies.

As soon as the weakest is knocked down, the cry for new blood is heard.

If Lehman disappears in a fire sale this weekend, the mob will turn on the next financial firm that seems to be the most vulnerable. It is sad that we have fallen to this level, but until confidence returns to the financial system, everyone is suspect.

So who might be next? Here are the most speculated candidates:

Merrill Lynch: It was not too long ago that Merrill was the biggest house on the Street. Should Lehman go, it will be smallest of the independents.

Under John Thain, Merrill has been slashing its holdings of mortgage-tied investments, writing down more than $30 billion in asssets in the last year. But it still has significant exposure to mortgage and deal debt and to collateralized debt obligations.

The firm recorded a loss in the second-quarter of $4.65 billion, after taking an additional $9.7 billion in write-downs. Some analysts have forecast additional write-downs in its third quarter.

Shares of Merrill fell as much as 17 percent on Thursday and they are down 11 percent today.

"I think the market's telling you that if Lehman is going to go away, Merrill is probably the next victim," Malcolm Polley, chief investment officer at Stewart Capital Advisors, told Reuters.

American International Group: The giant insurer is in trouble because it guaranteed derivatives that were tied to mortgages through credit-default swaps. These contracts contracts backed $441 billion of assets as of June 30, including $57.8 billion in securities tied to subprime mortgages, according to Bloomberg News.

A.I.G. needs to raise additional capital, but, as the experience of Lehman shows, that is increasingly difficult. In the last two weeks, its stock has been on a steep slide.

Washington Mutual: The nation's thrift has in recent days tried to rebuild investor confidence, saying that it had sufficient liquidity of about $50 billion and that conditions are stabilizing.

But Moody's Investors Service cut its rating on WaMu to junk status, citing "reduced financial flexibility, deteriorating asset quality, and expected franchise erosion."

The thrift, which said earlier this year that mortgage-related losses could total $12 billion to $19 billion this year, has ousted its chief executive and agreed to be effectively on probation with its regulator.

Its shares rallied late yesterday, but are down again today, so clearly not everyone is persuaded that WaMu is out of the woods.

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