/ 18 September 2008

Morgan Stanley in talks as fear grips financials

Morgan Stanley topped the list of major financial firms scrambling to find a buyer on Thursday, 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 United States 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.

Morgan Stanley shares were up 5% in trading before the New York Stock Exchange opened.

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 by 49%, while the United Kingdom government promised to rewrite competition laws to let the deal go through.

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

A Morgan Stanley spokesperson in Hong Kong declined to comment. A spokesperson at HSBC, which this week became the world’s biggest bank by market value, also declined to comment, though a source said 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 US savings bank Washington Mutual was also tipped for takeover.

Liquidy boost calms nerves
After Asian stocks plunged overnight, the US 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% to 2%.

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

The MSCI index of Asia stocks excluding Japan, which had been down almost 5%, was down just 0,8% after the central banks’ move, while Tokyo shares ended 2,22% lower. Hong Kong’s Hang Seng index ended flat, having earlier fallen more than 7%.

European banking shares rallied strongly, with the DJ Stoxx banking index up more than 4%, 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 fund-raising to help with its purchase of assets from Lehman Brothers, which filed for bankruptcy protection over the weekend.

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

”After the bailing out of AIG [American International Group] failed to reassure the market, it is difficult to imagine what could really stop the unorderly deleveraging that is going on,” French investment bank Calyon said in a Thursday note.

Panic
The US Federal Reserve had hoped its $85-billion rescue of insurer AIG on Tuesday would calm 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 by 23% 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 by nearly 14%, though later recovered their losses to end slightly higher.

”Stop the insanity,” pleaded a research note from Swiss bank UBS after US stocks plunged by 4,7% on Wednesday to a three-year low and the dollar slumped.

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% and 27%, 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 rumours, 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 US 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.

”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 chairperson Richard Kovacevich.

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

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

Their rescue of AIG came just more than 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. — Reuters