The second largest U.S. independent securities firm, Morgan Stanley, may sell a larger stake to China Investment Corp. and is in talks about a possible merger with Wachovia Corp., a person familiar with the matter said.
Morgan Stanley pared its loss in the New York Stock Exchange after the person said that China state-controlled fund may buy as much as 49 percent of the New York-based investment bank. The person declined to be identified because the talks are not public and may end in any agreement.
Morgan Stanley, led by chief executive John Mack, and Goldman Sachs Group Inc., the largest U.S. securities firm, placed increasingly yesterday as the deepening of the credit crunch fueled concern their sources funding are drying up. Morgan Stanley shares plunged 42 % this week as Lehman Brothers Holdings Inc. filed for bankruptcy protection and Merrill Lynch & Co. sold to Bank of Americas Corp.
John Mack certainly need the stability of core deposit base to Wachovia at this time, so I can see some of the outlines of such an agreement, but I think investors who greet one with some disbelief,”Nancy Bush , Founder and analyst at NAB Research LLC, said in an interview on Bloomberg Television. This is a very extraordinary moment.”
Morgan Stanley shares fell 1.46 dollars, or 6.7 percent to 20.29 dollars in New York Stock Exchange composite trading at 10:14 hours, after falling as much as 14 percent today. Wachovia rose 8.4 percent to $ 9.89.
China Investment Corp bought a 9.9 per cent participation at Morgan Stanley in December after the company reported a quarterly loss. The president of CIC, Gao Xiging, is in the U.S. with Wei Christianson, who heads Morgan Stanley business in China, the Financial Times reported today.
Mack led the employees this morning in a crowded meeting in New York, saying that the company earnings and balance sheet were sound, according to people who attended or seen the company throughout the broadcast of video. He said Morgan Stanley was the strongest manner in which Lehman or Bear Stearns Co., was forced to sell to JP Morgan Chase & Co. earlier this year.
Mack tried unsuccessfully earlier this week to persuade Vikram Pandit, CEO of Citigroup Inc., to combine their two companies, The New York Times reported today, citing people briefed on the talks. A Citigroup spokeswoman, Christina Pretto, said comments attributed to Mack said “ never.”
Mack received a call from Wachovia indicating interest yesterday, said a person with knowledge of the matter. Talks on an agreement with Wachovia had “ advanced,”CNBC reported today.
“ The smartest people in this company are focused on solutions,”Lake, the spokesman for Morgan Stanley, said yesterday.
Wachovia spokeswoman Christy Phillips-Brown said it was Bank’s policy not to comment on “ market rumors or merger speculation.”
Wachovia, the fourth largest bank in the U.S., plunged 21 percent after saying yesterday that it would support $ 494 million Lehman credits held by its Evergreen Investments money market funds. The lender, based in Charlotte, North Carolina, had a market value of $ 19.7 million yesterday, 18 percent less than Morgan Stanley of $ 24.1 million.
Wachovia CEO Robert Steel, hired in July to replace Kennedy Thompson, is cutting $ 1.5 million of costs and reduce risks to cope with the increasing losses of Wachovia for $ 122 million of adjustable rate option mortgage.
If you can create a merger between Morgan Stanley and another bank, which franchise will be very valuable because there is a lot of other international investment banking platforms out there that can duplicate that,”said Charles Peabody, partner and analyst Research in Portales Partners LLC in New York. Marriage that the funding structure, which is Wachovia, is a positive development.”
Merrill analyst Guy Moszkowski an agreement called little probable said in a note today that a combination with Wachovia that chair of Morgan Stanley with a substantial credit risk.” It’s hard for us to perceive a strategic benefit for Morgan Stanley, which would be merging with the weakest of the five largest U.S. banks,”Moszkowski wrote.
Morgan Stanley and Goldman has defended its business model, saying that they have sufficient capital and the deposit is not necessary funding that banks have. Mack, 63, can make short sellers to push his company shares lower.
In a memo to employees yesterday, Mack said that the management committee is to take all possible steps to stop this irresponsible action in the market,”and urged employees to contact customers to reassure them that the company is doing with firmness and a large amount of capital.
“There is no rational basis for our actions or movements of credit default spreads,” Mack wrote in the memo. We are in the midst of a market controlled by fear and rumors, short sellers and are driving our actions.”
The U.S. Securities and Exchange Commission may require hedge funds to disclose its short selling positions and plans to subpoena records of funds for its communication, Chairman Christopher Cox said in a statement yesterday afternoon.
Short sellers seek to profit by betting stock prices will fall. In a short sale, traders borrow shares of its agent who then sold. If the price falls, which buy back the shares, return it to your broker and pocket the difference.
Credit default swaps at Morgan Stanley increased to 900 basis points after falling earlier to 870 basis points, according to broker Phoenix Partners Group. Contracts in Charlotte, North Carolina-based Wachovia, the fourth largest bank in the U.S., rose to 695 basis points after falling to as low as 685 basis points. They are below 747 basis points yesterday, CMA data show. This are financial instruments based on bonds and loans used to speculate on a company the ability to repay debt or to protect themselves against losses. The value of contracts increases when investors deteriorates and the cost of protection rises.
Morgan Stanley’s plunge may add momentum to calls from Democrats in Congress for a broader effort by policy makers to tackle the financial crisis, including the creation of a government agency to assume the assets devalued.
“The private market screwed itself and that the government needs to come and help them to unscrew,” House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters yesterday afternoon after top lawmakers met with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke.