18Sep Morgan Stanley Said to Be in Talks With China’s CIC (Update2)

Sept. 18 (Bloomberg) — Morgan Stanley, the second-biggest independent U.S. securities firm, 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.

China’s state-controlled fund may buy as much as 49 percent of the New York-based investment bank, said the person, who declined to be identified because the talks aren’t public and may end in no agreement. Morgan Stanley resumed its decline on the New York Stock Exchange, falling as much as 22 percent.

Morgan Stanley, led by Chief Executive Officer John Mack, and Goldman Sachs Group Inc., the biggest U.S. securities firm, tumbled the most ever yesterday as the deepening credit crunch fueled concern their funding sources are drying up. Morgan Stanley shares plunged 42 percent this week through yesterday after Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch & Co. sold itself to Bank of America Corp.

“Morgan Stanley must be talking to any suitor,” said Roger Lister, a credit analyst at the DBRS Inc. rating firm in New York. “But I’m not sure whether a merger with a bank will solve the problems. It’s not a deposit-base issue but a crisis of confidence. And getting a capital infusion from the Chinese or somebody else brings huge dilution due to the depressed stock price, which scares investors even more.”

Morgan Stanley fell $4.32, or 20 percent, to $17.43 in New York Stock Exchange composite trading at 11:57 a.m. Wachovia rose 11.3 percent to $10.15.

Gao Xiqing in U.S.

China Investment Corp. bought a 9.9 percent stake in Morgan Stanley in December after the firm reported a quarterly loss. CIC’s president, Gao Xiqing, is in the U.S. with Wei Christianson, who runs Morgan Stanley’s business in China, the Financial Times reported today.

If Morgan Stanley “could come out and say we’re raising this slug of capital to stabilize our balance sheet and operate at a lower level of leverage going forward, that would help,” said Ben Wallace, a securities analyst at Grimes & Co. in Westborough, Massachusetts, which manages $850 million. “They’re so levered that they need to have the confidence of the market, and they don’t have that right now.”

Mack, 63, addressed employees this morning in a crowded meeting in New York, saying the firm’s earnings and balance sheet were sound, according to people who attended or watched the firm- wide video broadcast. He said Morgan Stanley was in stronger shape than Lehman or Bear Stearns Co., which was forced to sell itself to JPMorgan Chase & Cos. earlier this year.

Talk With Pandit

Two of the attendees, who declined to be named because they weren’t authorized to speak to the press, said Mack sounded upbeat and confident.

Mark Lake, a spokesman at Morgan Stanley in New York, declined to comment.

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 the Times attributed to Mack were “never stated.”

Mack got a call from Wachovia yesterday indicating interest, said a person with knowledge of the matter. Talks about a deal with Wachovia have “advanced,” CNBC reported today. A merger with Wachovia could involve dividing the assets of both companies into two separate entities, a “good bank” and a “bad bank,” the Wall Street Journal reported, citing an unidentified person familiar with the matter.

Bloomberg.com