Morgan Stanley in talks as fear grips financials

By Christian Plumb and Steve Slater 40 minutes ago

NEW YORK/LONDON (Reuters) - Morgan Stanley topped the list of major financial firms scrambling to find a buyer, while central banks rushed in $180 billion of extra liquidity to calm panicked stock and money markets.



Morgan Stanley was in deal talks with U.S. regional banking powerhouse Wachovia Corp and the negotiations have advanced to a more formal stage, a source familiar with the firm's plan said.

The No. 2 U.S. investment bank, whose shares are down 50 percent this month, has also approached Chinese sovereign wealth fund China Investment Corp about boosting its stake in Morgan Stanley, the source said, following a $5 billion investment late last year.



HSBC Holdings was named by CNBC as another potential bidder for Morgan Stanley, but a person familiar with the matter said the bank "is not interested."

Morgan Stanley and larger rival Goldman Sachs Group Inc, the largest surviving independent Wall Street investment bank, are facing concern that the credit crunch could constrict the short-term funding they've traditionally relied on. The deposit base of a commercial bank could be a more stable alternative.

Morgan Stanley shares were down 8 percent in early trading, but the cost of insuring its debt against default fell.

"Morgan Stanley is in merger talks with Wachovia, a move that would make more sense if Morgan were seeking synergies rather than seeking safety," Christopher Low, chief economist at FTN Financial in New York, said in a research note. "Wachovia, after all, has huge option ARM exposure through Golden West, and option ARMS are shaping up as this year's subprimes."

Wachovia shares rose 16 percent in morning trade, with the Dow Jones industrial average gaining 119 points. Following the near collapse and bailout of insurance giant American International Group Inc, Kraft Foods Inc replaced AIG in the index.

British bank Lloyds TSB took advantage of the market turmoil to achieve a long-held ambition by scooping up the country's biggest mortgage lender, HBOS, in a $22 billion all-share deal.

HBOS shares, which had slumped due to fears about its funding, soared 40 percent, and the UK government promised to rewrite competition laws to let the deal with Lloyds TSB go through.

As Morgan Stanley cast around for a lifeline, the Government of Singapore Investment Corp (GIC) said it would consider all possibilities, including taking a stake if approached.

Morgan Stanley officials in New York did not immediately return phone calls seeking comment.

A spokeswoman at HSBC, which this week became the world's biggest bank by market value, also declined to comment, but a source told Reuters the bank wasn't interested in Morgan Stanley.

A senior executive at CITIC Group's CITIC Securities arm said his firm was not in talks about investing in Morgan Stanley. An official at CITIC Group could not be reached for comment.

With the financial landscape undergoing its most dramatic transformation since the Great Depression, top U.S. savings bank Washington Mutual was also tipped for takeover.

LIQUIDITY BOOST CALMS NERVES

After Asian stocks plunged overnight, the U.S. Federal Reserve announced coordinated moves with five of the world's major central banks to add up to $180 billion in liquidity to global money markets, which gave some reassurance to panicked investors and slashed overnight money rates from 8.5 percent to 2 percent.

As an indication of the demand for liquidity, the Bank of England said it had received bids of 202 billion pounds for the 66 billion pounds on offer in its weekly open market operation.

The MSCI index of Asia stocks excluding Japan, which had been down almost 5 percent, was down just 1.3 percent after the central banks' move, while Tokyo shares ended 2.22 percent lower. Hong Kong's Hang Seng index ended flat, having earlier fallen more than 7 percent.

European banking shares gained, with the DJ Stoxx banking index up 1.6 percent, helped by the leap in HBOS stock and strong gains for Swiss banks UBS and Credit Suisse and for RBS and Barclays in London.

Barclays seized the rare positive moment to announce a 750 million pound fundraising to help with its purchase of assets from Lehman Brothers Holdings Inc, which filed for bankruptcy protection on Monday.

Russian stock markets remained closed for a second day, with the Kremlin pledging $20 billion in support when they re-open on Friday.

"After the bailing out of AIG failed to reassure the market, it is difficult to imagine what could really stop the un-orderly deleveraging that is going on," French investment bank Calyon said in a note on Thursday.

The Federal Reserve had hoped its $85 billion rescue of AIG on Tuesday might calm the markets, but financial stocks have continued to fall, triggering a wave of panicked matchmaking.

Shares of Macquarie Group, Australia's biggest investment bank, skidded 23 percent to their lowest level in more than five years amid funding worries.

Industrial and Commercial Bank of China, which had been the world's most valuable bank until being surpassed by HSBC on Wednesday, fell nearly 14 percent, though later recovered those losses to end slightly higher.

The AIG rescue capped a week of bailouts, bankruptcy and moves by central banks around the world to flood the financial system with funds to prevent it from seizing up.

'ANYTHING'S POSSIBLE'

Washington Mutual, beleaguered by mortgage losses, put itself up for sale, sources familiar with the situation said. Potential suitors include Citigroup, JPMorgan, Wells Fargo and HSBC.

WaMu shares soared 18 percent in early trading.

Last weekend, investment bank Merrill Lynch & Co struck a deal to sell out to Bank of America Corp.

U.S. authorities have spent $900 billion to prop up the financial system and housing market.

The rescue of AIG came just over a week after the government bailed out mortgage finance companies Fannie Mae and Freddie Mac, and six months after the Fed brokered the sale of failed investment bank Bear Stearns to JPMorgan Chase.

(Additional reporting by Joseph A. Giannone and Richard Leong in New York, Olesya Dmitracova in London, Kevin Plumberg and Tony Munroe in Hong Kong and Saeed Azhar in Singapore; Editing by Alexander Smith, Will Waterman and John Wallace)