Citigroup Inc. (NYSE:C) reportedly received a call from an invetment banker suggesting that it explore the possibility of merging with Bank of America (NYSE:BAC) as the bank deals with billions of dollars in writedowns stemming from losses in the subprime and credit markets. The rumor caused a spike in the stock, but the two banks immediately dismissed it as nothing more than rumor.

Citigroup's board responded by calling the approach "totally out of hand" saying that no discussions have taken place. Meanwhile, Bank of America said it never authorized a formal proposal to Citigroup. And finally, a person familiar with the matter reportedly said that Citigroup would be unlikely to consider such a merger as the bank would be very difficult to manage.

The rumor gained traction due to Citigroup's recent $7.5 billion cash infusion from the Gulf Arab emirate of Abu Dhabi, which gave it fresh capital to repair the subprime mess and explore other opportunities.The new Arab emirate will be the bank's largest shareholder following the transaction. Many speculated that the company may use this cash to acquire other bank stocks that are cheap as a result of the crisis.

In the end, this is news that is worth following. After all, there is likely to be continued speculation on the use of the funds Citigroup acquired. Bank stocks are also up today on hopes that the Fed will cut interest rates once again. Combined, these factors make C a stock worth watching!

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