CHARLOTTE, N.C., Sept. 27 (UPI) -- Financially troubled Wachovia Corp. (NYSE:WB), the fourth-largest U.S. bank, has entered into merger talks with possible U.S. and Spanish partners, sources say.

Wachovia, of Charlotte, N.C., has massive exposure to exotic adjustable-rate mortgages and is one of the hardest-hit banks in the collapse of the U.S. housing market. Now it is seeking a lifeline by negotiating possible merger deals with Wells Fargo (NYSE:WFC), Citigroup and Spain's Banco Santander (NYSE:STD), The New York Times (NYSE:NYT) reported Saturday.

Wachovia inherited $120 billion in "option ARM" mortgages through its ill-timed acquisition of Golden West, a big California mortgage lender, at the end of the housing boom in 2006, analysts said.

Unnamed sources told the Times that merger talks are at early stages, but it appeared Wachovia was seeking merger alternatives if a $700 billion financial industry bailout plan being debated by Congress fails to provide enough help.

Wachovia's share price, down nearly 80 percent in the last year, plunged 27 percent Friday to $10 per share after Washington Mutual (NYSE:WM), a similarly troubled bank, was seized by the federal government.

Britain readies Bradford & Bingley seizure

LONDON, Sept. 27 (UPI) -- The British government says it is preparing to nationalize Bradford & Bingley Bank as the search for a private sector buyer is proving fruitless.

If the troubled lender is taken over, it would mark the second time in seven months the government has made such a move, rescuing Northern Rock (OTCPK:NHRKF) in February, The Times of London reported Saturday.

British Chancellor Alistair Darling Friday ordered officials to prepare to takeover Bradford & Bingley, a Treasury spokesman told the newspaper, saying, "You would expect us to have contingency plans."

A government seizure of Bradford & Bingley would mean $74 billion of assets and liabilities onto the taxpayers' balance sheet, which in turn would likely trigger a revolt from the bank's shareholders, who just injected $737 million into the business, the newspaper said.

Bradford & Bingley specializes in buy-to-let mortgages and other higher-risk lending and this week endured a series of credit rating downgrades, with shares falling to an all-time low of 36 cents Friday.

SEC chief: Voluntary regulation a failure

WASHINGTON, Sept. 27 (UPI) -- U.S. Securities Exchange Commission Chairman Christopher Cox, a longtime proponent of deregulation, says lack of oversight helped cause the financial crisis.

Cox made the admission Friday, saying the voluntary regulation program that had been in place to monitor Wall Street's largest investment banks had failed, The New York Times reported.

"The last six months have made it abundantly clear that voluntary regulation does not work," Cox said in a statement, adding that the program had been shut down and authority to regulate investment banks had been transferred to the Federal Reserve.

The program "was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily," the Times reported Cox as saying. "The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate" of the program, he said.

The statement came as the SEC's inspector released a report strongly critical of the agency's monitoring of collapsed investment bank Bear Stearns (NYSE:BSC), the Times said.

Report: Freddie Mac (NYSE:FRE) was shedding mortgages

WASHINGTON, Sept. 27 (UPI) -- Mortgage giant Freddie Mac was quickly shedding mortgages in an effort to raise cash when it was seized by the U.S. government, new figures show.

U.S. Treasury officials said when they were taken over this month that Freddie Mac and its sister mortgage firm, Fannie Mae (NYSE:FNM), were cutting back on their primary roles of supporting the U.S. mortgage markets, a prime justification for the seizure. That assertion about Freddie Mac has been borne out by newly released figures, The Washington Post (NYSE:WPO) reported Saturday.

The financial records show that Freddie Mac officials had trimmed the company's mortgage portfolio by $37.4 billion in August, which, if it would have continued, would have cut its portfolio in half within a year, the newspaper said.

Freddie Mac and Fannie Mae play key roles in the U.S. mortgage market by buying mortgages from lenders, supplying them with cash to make more loans. Since their takeovers, the entities have been ordered return to their core mission by buying more mortgages in an effort to strengthen the struggling mortgage market, the Post said.

Increasing mortgage delinquencies reduced the value of Freddie Mac's portfolio and forced it to cover more losses on loans it guarantees.