Wachovia, Morgan Stanley are reportedly in talks
NEW YORK — Morgan Stanley and Wachovia Corp. are in talks about a possible combination as the investment bank tries to come up with ways to survive the ongoing credit crisis, according to media reports.
John Mack, Morgan Stanley’s chief executive, received a call from Wachovia about a potential deal, according to The New York Times and Wall Street Journal. Both newspapers cited people familiar with the discussions. The talks are described as preliminary. Spokesmen for Morgan Stanley and Wachovia declined to comment.
Wachovia’s retail securities brokerage unit is based in St. Louis.
Other banks also have expressed interest in Morgan Stanley, according to the reports.
Shares of Morgan Stanley and fellow investment bank Goldman Sachs plunged Wednesday, a sign that investors fear they can’t survive in their present form as the last two major independent investment banks.
Executives of both companies insisted a day earlier, when they were reporting profits for the most recent quarter, that they do have the financial wherewithal to go it alone.
But analysts said the question increasingly is whether continued market turmoil could force them to acquire or be acquired by commercial banks, whose deposit-taking operation would provide a stable source of funding. The upheaval in the U.S. financial system has driven Merrill Lynch & Co. and Bear Stearns Cos. into emergency sales, and Lehman Brothers Holdings Inc. into bankruptcy.
Those in favor of such combinations believe that the sale of Merrill Lynch and collapse of Lehman Brothers might force the remaining investment banks to pursue some kind of transaction to stabilize results. The steady funding base of deposits held by commercial banks would go a long way in assuage investors concerned about volatility.
Anxious investors on Wednesday bid up the price of protecting against a default of debt issued by the two investment banks. The spike in credit default swaps has fanned fear on Wall Street that the investment banking model is in jeopardy of extinction.
John Mack, Morgan Stanley’s chief executive, struck back on Wednesday. He told employees in an e-mail that the No. 2 U.S. investment bank was "in the midst of a market controlled by fear and rumors."
"I know all of you are watching our stock price (Wednesday), and so am I," he said in the e-mail guaranteed cash advance. "After the strong earnings and $179 billion in liquidity we announced — which virtually every equity analyst highlighted in their notes this morning — there is no rational basis for the movements in our stock or credit default spreads."
Shares of investment banks have been sideswiped by a wave of short selling, which can cause big swings as investors bet that a stock’s price will fall so they can profit from it. Morgan Stanley shares fell as much as 44 percent Wednesday and closed down 26 percent, and Goldman shed more than 35 points before narrowing its loss to about 18 percent.
The Securities and Exchange Commission on Wednesday took measures to rein in aggressive forms of short-selling.
Roy Smith, a professor of finance at New York University’s Stern School of Business, believes the companies can survive on their own but remains concerned about the current environment in which they operate.
Morgan Stanley had hoped to stem investor panic about its financial health by releasing third-quarter results a day earlier than planned. On Tuesday, the company posted better-than-expected profits, and while Goldman Sachs’ profit slumped 70 percent, it did finish the quarter in the black.
Goldman Sachs Chief Financial Officer David Viniar and Morgan Stanley CFO Colm Kelleher both said their firms were able to navigate through the market dislocation and vowed to remain independent. The CFOs said their firms have enough cash on hand and no need to raise more.
Spokesmen for both investment banks declined to comment Wednesday about the plunge in their shares.
Glenn Schorr, an analyst with UBS, on Wednesday said the market reaction was "insanity." He said Goldman and Morgan Stanley aren’t running out of money and remain profitable.
"The world should really be concerned about this because if we continue to squeeze the financial system’s balance sheet and see fewer players in the business, the available credit to corporations and hedge funds will shrivel up and the cost of capital will continue to skyrocket across the board," he said.