Morgan Stanley, banks rush to complete deals

[September 19, 2008]  NEW YORK (AP) -- Wall Street entered into another round of speed dating, with bankers representing Morgan Stanley and Washington Mutual scrambling to put together deals in the biggest realignment of the financial industry since the 1930s.

Once vaunted investment banks like Bear Stearns, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. have lost their independence or been toppled at a breath-taking pace. And for a time on Thursday, fears intensified that the spreading credit crisis threatened to drag down the remaining global financial institutions and Main Street banks alike.

Shares of financial stocks initially plunged, then recovered as part of a dramatic afternoon reversal for most stock indexes after CNBC reported that Treasury Secretary Hank Paulson might back the creation of a new Resolution Trust Corp. to soak up bad loans and defaulted mortgages, their shares reversed course. The RTC was created by the government during the savings and loan crisis of the 1980s.

Treasury officials declined comment about whether that report was accurate.

Morgan Stanley slumped more than 46 percent in early trading as investors fretted about its ability to quickly find a buyer or cash infusion from a foreign investor. Rival Goldman Sachs Group Inc. skidded 25 percent.

Morgan Stanley shares rallied to close up about 4 percent while Goldman Sach's stock was lower by almost 6 percent. And Washington Mutual Inc. shares soared more than 48 percent.

Sen. Charles Schumer, D-N.Y, put forth his own proposal, calling for the government to lend struggling banks money in exchange for an equity stake. In return, banks would back legislation allowing homeowners who have declared bankruptcy to renegotiate their mortgages in order to keep their homes. Schumer contends an RTC-like entity could find it difficult or impossible to sell off complex mortgage-related investments.

That might provide the lifeline needed to help prop up the ailing banks and investment banks, said Anthony Sabino, professor of law and business at St. John's University. He notes, however, that CEOs might still go ahead with deals they believe make sense.

"This is history repeating itself," he said. "The debacle of the S&L crisis created the RTC, and we are faced with a similar crisis because we didn't learn from history. This is yet another lifeline."

But the question is whether such a plan could be turned into reality soon enough to take the pressure off Morgan Stanley and Goldman Sachs to do deals.

"People are finally realizing that we are probably in the worst financial crisis since the Depression," said Alfred E. Goldman, chief market strategist for Wachovia Securities, a 49-year veteran of Wall Street. "We're in a period of excessive fear."

Recent market turmoil has heightened fears that investment banks, which rely heavily on short-term borrowing to finance their proprietary trading and lending businesses, need to find more stable sources of funds to ride out market volatility.

Some investors believe that the investment banks must combine with an institution that offers a stable base of bank deposits. That was one of the reasons Merrill Lynch agreed to be acquired by Bank of America Corp. earlier this week.

Economists including former Federal Reserve Chairman Alan Greenspan and investors like Wilbur Ross predict more banks will fail in a shakeout reminiscent of the Great Depression. After the stock market's crash in 1929, 9,000 institutions failed and $140 billion of deposits were wiped out in the following decade.

The government adopted policies to protect bank depositors since then and government agencies have already closed nearly a dozen insolvent banks while making provisions to reopen them under new ownership in recent months.

Global banks and brokerages have written down more than $350 billion of distressed investments since the crisis began last year, and now bankers are looking to avoid becoming another statistic.

Morgan Stanley, the No. 2 U.S. investment bank, is in talks with a number of potential suitors and investors to help it survive, according to people familiar with the situation who asked not to be identified by name because the discussions were still ongoing.

John J. Mack, chief executive of the 73-year-old securities firm, on Thursday told the company's 48,000 employees in a townhall meeting that he's doing everything possible to keep the embattled bank afloat. Mack, a day earlier, said his bank was "in the midst of a market controlled by fear and rumors."

He made a round of telephone calls late Wednesday to strike a deal or raise cash in a bid to calm investors and prevent more damage to Morgan Stanley's free-falling shares, these people said. The stock has plunged about 76 percent this past week, and the market remains worried that the company faces collapse if Mack fails to secure some kind of arrangement.

Morgan Stanley has opened up talks on a number of fronts. Discussions are taking place with deep-pocketed investors such as China's sovereign wealth fund and state-owned bank Citic Group, and the Singapore Investment Fund about a possible cash infusion, people familiar with the discussions said.

There are also advanced negotiations with executives from retail bank Wachovia Corp., one person said. Other suitors could include big global banks such as Britain's HSBC Holdings PLC and Germany's Deutsche Bank.

Wachovia declined to comment about a potential deal. Spokesmen for GIC and Citic could not immediately be reached for comment.

Meanwhile, Seattle-based Washington Mutual, which has lost billions and seen its shares plummet due to subprime mortgage exposure, has hired Goldman Sachs to contact potential bidders -- a list that so far includes Wells Fargo & Co., JP Morgan Chase & Co. and HSBC.

And in London, Britain's Lloyds TSB Lloyds TSB announced a $21.85-billion deal to take over struggling HBOS PLC, Britain's biggest mortgage lender.

"This isn't just a U.S. problem, it is a global problem," Stu Schweitzer, JPMorgan Chase & Co.'s global markets strategist told the bank's institutional clients on a conference call this week. "The economy has its problems, the financial system has its problems, we can believe in Armageddon or believe that in the end, step by step and trial and error, the authorities will get it right."

The U.S. government, which helped organize an $85 billion bailout of insurer AIG on Tuesday, also sought to break the grip of worsening global credit crisis by pumping billions into financial markets in a concerted action with central banks of other countries. The Federal Reserve Bank of New York, in two operations, injected $55 billion into temporary reserves in the United States, a move aimed to help ease a strained financial system in danger of freezing up.

The move helped steady Wall Street after the previous session's massive rout. However, market participants still moved into safe assets such as gold and Treasury bills, a sign that they remain skittish during the most troubling period for the world's financial system in most investors' memory.

[Associated Press; By JOE BEL BRUNO]

AP Business Writers Jeannine Aversa in Washington, Michael Liedtke in San Francisco, and Tim Paradis in New York contributed to this report.

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