Morgan Stanley under spotlight on merger speculation; extra financing will help bank, advisor says

By Kenneth Lim

Boston, Sept. 18 - Investors continued to keep a wary eye on structured product issuers on Thursday amid speculation that more banks may need financing.

Morgan Stanley, currently the second-most active structured agent in the United States, found itself under the spotlight as it became the third major investment bank in the week believed to be looking for a buyer.

Media reports on Thursday and late Wednesday had Morgan Stanley reportedly considering strategic options.

The news came after Merrill Lynch & Co. Inc. said it would be bought by Bank of America Corp., and a bankruptcy filing by Lehman Brothers Holdings Inc., which failed to find a buyer - although Barclays subsequently agreed to buy the North American investment banking operations.

Morgan Stanley chief executive John Mack told employees on Thursday that the bank was in merger talks with Wachovia Corp., and that the company was also in discussion with certain institutional investors. But Mack also said the bank was exploring its options as a precaution. Morgan Stanley remains on firm financial footing, Mack told employees.

Morgan Stanley currently holds the second spot on the structured product league tables, with $6.946 billion, according to preliminary data compiled by Prospect News.

Move seen as positive

The Morgan Stanley news was a positive development, an investment advisor said.

"Their credit isn't in trouble yet, so it looks like they're trying to find some extra financing to boost their capital just in case they need it later," the advisor said. "If they're successful, that would be good news."

"I know some people would say they wouldn't be looking for money if they didn't need it, and that's a reasonable thing to say, but these are unusual times, and I can see how they would want to be extra cautious,' the advisor said.

But the advisor was concerned that a merger with Wachovia, which is loss making and facing negative credit outlooks at some ratings agencies, may not improve Morgan Stanley's credit quality.

"I'm not a bank analyst, so I won't pretend that I'm an expert, but I have my doubts about a merger with Wachovia," the advisor said. "Wachovia's got problems of its own, and when you add the two of them together, it's hard to see how it will improve Morgan Stanley's credit. If Morgan Stanley wants a safety net, I don't see how Wachovia's the best choice."

Investors still hold back

The advisor was holding off of buying Morgan Stanley-issued products until the picture becomes clearer.

"I think everyone's being extremely cautious nowadays," the advisor said. "I'm not putting a stop to investing. I'm just not going to buy from someone if there's some doubt about the quality of their credit...It's the big, stable names. JPMorgan, UBS, some of the foreign banks, third-party issuers. If you ask around, I think you're going to hear the same names from a lot of people."

The caution may not necessarily be justified by fundamentals, the advisor said.

"I wouldn't be surprised if we're all overdoing it a little," the advisor said. "But nobody wants to be the fool. And as an investment advisor it's my responsibility to make sure I don't put my clients' money at risk, so that's the kind of risk I won't take."

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