Desperate times

Wall Street's second largest investment bank scrambled for a buyer yesterday, but investors questioned the logic of a merger between Morgan Stanley and a troubled US regional bank.

Wall Street's second largest investment bank scrambled for a buyer yesterday, but investors questioned the logic of a merger between Morgan Stanley and a troubled US regional bank.

News that Morgan Stanley's chief executive, John Mack, had discussed a possible merger with Wachovia's chief executive, Robert Steele, hit markets which are already reeling from the fall of other investment giants.

The US Federal Reserve, and central banks in Europe, Canada and Asia, pumped as much as $180billion into money markets yesterday to combat shock waves from the worst financial upheaval since the 1930s.

Reports that Morgan Stanley, one of the last two independent US merchant banks, was in merger talks saw its shares nosedive 24percent yesterday.

The reasoning behind a Morgan Stanley merger with Wachovia was questioned by investors and analysts who worried that a combination of the investment bank and the troubled regional bank would not improve Morgan Stanley's prospects.

Morgan, mindful of its plunging stock and rising default insurance prices this week, also discussed deals with other banks.

Morgan's talks with Wachovia were reported to have advanced to a more formal stage. Neither company could be reached immediately for comment.

While there is growing consensus that investment banks need the deposits and capital of commercial banks to get through the protracted credit crunch, investors were left flat by the idea of a Wachovia-Morgan merger.

Merrill Lynch analyst Guy Moszkowski declared the deal "unlikely, in our view".

"To avoid marking Wachovia's balance sheet to market, a potential deal would probably involve Wachovia buying Morgan Stanley," the veteran analyst wrote in a morning note to clients. "This could help Wachovia but would give Morgan Stanley considerable credit risk."

Morgan shares have lost half their value since September 5, when markets fell on fears that struggling mortgage finance giants Fannie Mae and Freddie Mac needed a government bailout.

A deal with Wachovia would fail to resolve Morgan's biggest need, which is reliable short-term funding, said Moszkowski. "The merger wouldn't create new deposits, and most of the combined company would still need market-based funding," he said. - Reuters, Sapa

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