The Reserve Bank Governor, Glenn Stevens forecast it a fortnight ago and today it happened with Westpac surprising the market with a deal to pick up the brand name, franchisees and future business of the troubled Rams home loan group.

It was David Morgan’s parting gift to his successor at Westpac, Gail Kelly, and it has set off speculation that other non-bank lenders may be snapped up by the big banks as they struggle to get finance.

The news saw the banking sector set alight this morning: at 11.30am Westpac had jumped 75c to $29.23, NAB was up 77c at $40.57, the ANZ rose 52c to $30.13, the CBA rose 61c to $57.21 and St George (Gail Kelly’s old bank) rose 49c to $35.89.

Westpac Banking will take over Rams franchises and its future business for $140 million, a deal that saw the shares slump 16c to just 69c at 11.30am. At that level the company is valued at $243.5 million, compared to the $2.50 issue price on July 27 which valued the company at $882.5 million. The rump of the Rams group will remain listed with its existing $14.5 billion loan book.

Rams has been troubled for the past seven weeks after it failed to refinance $6.1 billion in short-term debt during the height of the credit market freeze. It has been searching since then for a new funder without success.

Westpac’s move came as a surprise because the National Australia Bank, which was Rams’ banker, was a big tip to do a deal, especially after around 10% of Rams was snapped on the market late last month.

The deal will see Westpac expand its local mortgage business by around 10%. Westpac will provide $1.5 billion to help Rams refinance its short-term debt and the sale of Rams’s 92 franchises is scheduled to be completed by January, subject to approval by shareholders meeting next month.

Westpac says it will also fund up to $500 million in new Rams loans from November 15.

Short term money market rates for bank bills are still high: 6.88% or so for 90 day bills and a touch under 7% for 180 day paper. The Reserve Bank is still maintaining liquidity and left $2.1 billion in the exchange settlement accounts yesterday, even though the short market had a $145 million surplus.