More in today’s Money Morning:

The five New York-based securities firms that dominated Wall Street have been reduced to two: Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). Both firms will report a profit decline for the third quarter – but unlike Merrill Lynch and Lehman, Goldman and Morgan Stanley have remained profitable throughout the year.

“I think highly of Morgan Stanley and Goldman Sachs, so I expect them to ride this out,” Roger Altman – the CEO of investment banker Evercore Partners Inc. (NYSE:EVR) and a former deputy treasury secretary – said during an interview on CNBC. “But as to whether we’ve seen the last of this crisis, I think the answer to that is clearly: ‘No.’ And exactly where it goes from here and how it unfolds, I’m unsure.”

But how did it get this far?

The financial-sector convulsions that started in the summer of 2007 already have eliminated The Bear Stearns Cos., which in March was forced into a government-supported, cut-price sale to JPMorgan Chase & Co. A week ago, the U.S. Treasury Department took control of mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) – placing them into a conservatorship – after concerns that foreign central banks would stop buying our bonds actually forced the government’s hand.

Fed and U.S. Treasury officials met in an emergency session as Barclays PLC (ADR: BCS), the U.K.’s third-largest bank, and Bank of America Corp. (NYSE:BAC) abandoned talks to acquire Lehman after failing to win government guarantees against losses. The companies were considered leading candidates to acquire the 158-year-old investment bank after record losses erased 94% of its stock value this year.

Because the central bank and the Treasury had already intervened with the “shotgun” marriage of Bear Stearns and JPMorgan – underwriting $29 billion in assets as part of the deal – and with the conservatorship for Fannie and Freddie, most observers expected the financial sector’s dynamic duo to work their magic yet again.

But it was not to be.

That’s where the takeover talks took an odd turn. Although Merrill and Lehman are both investment banks – Merrill focuses on the brokerage business while Lehman keys on the institutional portion of the market – both firms made an ill-fated foray into real-estate-related investments.

Understanding that global investors would lump Merrill in with the other troubled companies as the crisis worsened, new CEO John A. Thain began buyout talks with Bank of America CEO Kenneth D. Lewis, published reports state.

One person briefed on the negotiations said Thain had rebuffed Bank of America when it approached Merrill earlier this summer. But understanding how a Lehman bankruptcy would whipsaw the markets, Thain realized a deal was the best answer this time around, The Times reported.

Bank of America will swap 0.8595 shares of its stock for each Merrill share. That works out to $29 a share, based on Bank of America’s closing price of $33.74 on Friday.

“A merger between Merrill and Bank of America is a good idea,” Richard Bove, an analyst at Ladenberg Thalmann & Co. in Lutz, Fla., told Bloomberg. “If Lehman fails, the next bank to be attacked would be Merrill. They are attempting to forestall that attack by linking with Bank of America.”

Bank of America – often referred to as BofA – may end up as the new big kid on the block in the U.S. financial-services sector. Earlier this year, Bank of America agreed to buy troubled mortgage lender Countrywide Financial Corp. – in a $4 billion all-stock deal that would make BofA the largest mortgage lender and loan provider in the U.S. market.

Some top experts like BofA’s bargain-hunting strategy.

“My bet is that Ken Lewis has made a very wise investment,” Saturnino S. Fanlo, CEO of KKR Financial Holdings LLC (NYSE:KFN), told a reporter. “I believe over time it will prove to be a great decision.”

Debt-rating firm Standard & Poor’s Inc. cut its long-term counterparty credit rating on Bank of America Corp. to AA- from AA and the credit ratings on the holding company were put on CreditWatch with “negative implications,” Bloomberg said late yesterday. Moody Corp.’s (NYSE:MCO) Moody’s Investors Service unit also is reviewing BofA’s debt for purposes of cutting the rating.

But that doesn’t faze Lewis, the BofA CEO.

“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” Lewis, 61, said in the statement.

Source: Buyout of Merrill and Bankruptcy of Lehman Heightens Worry of U.S. Credit Crisis Pain Still to Come

A great way to play the airlines woes is by investing in vanadium. The little-known metal is in high demand due its use in fuel-efficient engine technology. Its primary use is in ultra-light, super-strong metal alloys.

Vanadium is scarce. And there’s high demand for it. This makes it a great investment, says Chris Mayer…

Ultra high-strength and super-light steels are the plastics of the 21st century. There is high demand for these steels for use in everything from jet engines to rail components. In turn, there is a big push for the quirky metals so critical in making them. And in those quirky metals are good opportunities for investors. One of them is vanadium.

For some industries, such as airlines, finding a more fuel-efficient way to do business is a matter of survival. According to a recent Financial Times article, it’s “triggered a massive jump in the price of obscure and scarce metals that are used to improve the fuel economy of jet engines.”

The quest for fuel-efficiency goes beyond just the airlines, of course. It extends to rail cars and automobiles, to power plants and high-speed drilling. Vanadium’s primary use: to strengthen steel. Combine it with titanium and you get the best strength-to-weight ratio of any engineered material. That makes it practically irreplaceable in aerospace and other industries. Companies also use vanadium to produce sulfuric acid, and in nuclear power plants. Vanadium also promises new advances in battery technology. Giant vanadium batteries power wind farms and solar power plants.

In the great infrastructure boom, vanadium takes its place at the table of other rare and obscure metals that are growing much more important. The price of vanadium, as with many of these metals, is way up. For most of last year, vanadium cost $40 per kilogram. In February, it hit $90 per kilogram. It has since come back some, but it rallied to over $80 again recently.

The rocketing vanadium price is no mystery. Demand is strong, while supplies are constrained. A big part of the supply constraint lies in South Africa. That’s because a massive electricity shortage is preventing many mines from operating at full capacity. As the CEO of Windimurra Vanadium (ASX:WVL), an Australian mining company, put it: “The market is very sensitive to power supply issues. Large South African miners are facing up to 15 percent restrictions to their power supply… The supply of vanadium will remain tight, and that’s factoring in a best scenario for South African producers, which is no guarantee.” In March, Xstrata (LON:XTA), which produces about 12 percent of the world’s vanadium, said it would cut its deliveries by 10-15 percent in the second quarter. And Highveld, the world’s biggest producer of vanadium, said in February that power outages posed a “considerable threat” to future output.

The vanadium market also has some interesting quirks. For example, 98 percent of the world’s vanadium comes from only three countries — China, Russia and South Africa. South Africa, we know, has power issues. China’s Sichuan province, devastated by earthquake, was also a rich vanadium producer. Moreover, China is becoming as much a consumer of vanadium as a producer. So vanadium exports from China are dropping. Last year, China ended its export credits for vanadium because it needed the metal more at home. This year, China went further and put an export tariff in place.

China’s vanadium use per quantity of steel is still well behind the curve compared with the U.S.’ If China were to use as much vanadium as U.S. steel producers, the vanadium market would face a one-third increase in demand. That’s a pretty nice long-term tail wind for vanadium.

Russia’s Evraz Group (LON:EVR) is the world’s largest producer of vanadium, with about 27 percent of supply. I think it’s safe to say that Russia has been an uneven producer of certain commodities. And as the Russians like to change the rules of the game as it suits them, I would not rely too heavily on Russian supply. And finally, there are no stockpiles of vanadium or substitutes of equal quality.

So where are the opportunities?

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It’s tough to find a good pure play that is easy to buy. Most of the producers are in China or South Africa or Australia. And these producers make lots of other metals. You wouldn’t buy Xstrata just because you like vanadium. You’d also have to understand a host of other metals that contribute much more to Xstrata’s bottom line than vanadium. One interesting company is Denison Mines (AMEX:DNN). Vanadium could represent up to a third of Denison Mines’ revenues in 2008. The problem with Denison is that it is mainly a uranium play. To invest in Denison, you have to like uranium; you get the vanadium exposure as a bonus. Denison is probably cheap, although I haven’t looked at it in great detail.

Some of the best ideas are just in the prospecting stage or emerging as producers. There are a few in Australia, including Windimurra Vanadium and Reed Resources. Both have big vanadium resources and could each eventually represent 6-8 percent of global production.

One of my favorite vanadium ideas I’m keeping an eye on is Largo Resources (CVE:LGO). Largo has the world’s highest-grade vanadium mine, in Brazil. It’s close to infrastructure and located in a mining-friendly state. The company should have a completed feasibility study in July. Production should start in 2010. It’s highly speculative, but promising.

The company also has a molybdenum and tungsten project in the Yukon, called Northern Dance. These metals are also important in infrastructure.

Scarcity is a great thing when you are an investor. Finding companies that own something scarce — with good long-term demand behind it — is a winning formula for finding good ideas.

Source: Finding Fuel Efficient Metals