Morgan Stanley In Merger Talks, as Fears Grip Financials

HONG KONG/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 bring some calm to panicked stock and money markets.

Morgan Stanley was discussing a deal with U.S. regional banking powerhouse Wachovia, according to a source familiar with the matter, while CNBC said HSBC Holdings and China’s CITIC Group were also eyeing Wall Street’s second-largest investment bank.

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 to end a slump in HBOS shares prompted by fears about its funding.

HBOS stock soared 49 percent, while the UK government promised to rewrite competition laws to let the deal go through.

Among possible buyers of Morgan Stanley, the Government of Singapore Investment Corp (GIC) said it would consider all possibilities, including taking a stake if approached.

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

A senior executive at the Chinese group’s CITIC Securities arm said his firm was not in any talks about investing in Morgan Stanley, and an official at the 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

Early on Thursday, the U.S. Federal Reserve announced measures worth up to $180 billion in a coordinated move with five of the world’s major central banks to improve liquidity in global money markets, which gave some reassurance to panicked markets.

The MSCI index of Asia stocks excluding Japan, which had been down almost 5 percent, was down 0.8 percent after European markets opened, 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, which had been indicated to open sharply lower, rallied strongly, with the DJ Stoxx banking index up over 4 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, which filed for bankruptcy over the weekend.

But 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 Thursday note.

The U.S. Federal Reserve had hoped its $85 billion rescue of insurer American International Group on Tuesday might have calmed the markets, but financial stocks have continued to fall, triggering a wave of panicked matchmaking.

Shares in 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 their losses to end slightly higher.

“Stop The Insanity,” pleaded a research note from Swiss bank UBS after U.S. stocks plunged 4.7 percent on Wednesday to a three-year low and the dollar slumped.

Overnight U.S. dollar lending rates have soared this week and reached as high as 8.5 percent on Thursday, though the concerted action by central banks later brought them tumbling 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 on offer in its weekly open market operation.

Japan and Australia also pumped an extra $17 billion into money markets on Thursday to prevent banks from hoarding cash.

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.

Shares of Morgan Stanley and larger rival Goldman plummeted as much as 43 percent and 27 percent, even after both reported better-than-expected quarterly earnings.

The cost of protecting debt in both spiked, reflecting fears that their debt issues are no safer than junk bonds.

Morgan Stanley’s Mack blamed short sellers, who bet on falling stock prices, saying in an internal memo: “We’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down.”

“The fear is who is next,” said John O’Brien, senior vice president at MKM Partners in Cleveland. “It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear.”

‘ANYTHING’S POSSIBLE’

The U.S. Securities and Exchange Commission stepped in to curb short-selling, but share slumps stoked talk that Wall Street’s two surviving investment banks may have to join up with a commercial bank to survive.

Morgan Stanley CEO John Mack got a phone call from Wachovia on Wednesday but is also pursuing other options, the New York Times reported.

“In this market, anything’s possible. It seems like the market wants the investment banking model to disappear,” said Danielle Schembri, a bond analyst covering brokers at BNP Paribas in New York.

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.

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

“I think there’s going to be a lot of mergers and acquisitions for either good reasons or because people don’t have choices,” said Wells Fargo Chairman Richard Kovacevich.

He said his company was “buying with both hands” and said that he felt “like a kid in a candy store” given the distressed state of financial assets, but declined to comment on targets.

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

Their rescue of AIG came just over a week after bailing 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.

By Tony Munroe and Steve Slater
(Additional reporting by Kevin Plumberg in Hong Kong and Saeed Azhar in Singapore; Editing by Jean Yoon, Alexander Smith and Will Waterman)