Wednesday, September 17, 2008

Banks rush to do deals as Wall St crisis deepens

Banks rush to do deals as Wall St crisis deepens

Wed Sep 17, 2008

By Jack Reerink

NEW YORK (Reuters) - Wall Street's manic dealmaking reached a new pitch on Wednesday as U.S. share prices plummeted to three-year lows and forced increasingly desperate major banks to scramble for merger partners.

With the financial landscape undergoing its most dramatic transformation since the Great Depression, reports emerged of takeovers involving No. 2 U.S. investment bank Morgan Stanley, weakened top U.S. savings bank Washington Mutual and major UK mortgage lender HBOS.

"This is indicative of the changes that are shaking the foundation of the financial system in today's world," said Frank Husic, Managing Partner of Husic Capital Management in San Francisco.

The flurry of potential deals followed the surprise $85 billion rescue of insurer American International Group by the U.S. Federal Reserve on Tuesday that did little to calm investors' nerves.

"Stop The Insanity," pleaded a research note from Swiss bank UBS as U.S. financial shares appeared to be in free-fall. The U.S. stock market plunged 4.7 percent to a three-year low, the dollar slumped, while safe-haven U.S. Treasury bonds and gold soared.

The AIG rescue capped a week of bailouts, a bankruptcy on Wall Street and moves by central banks around the world to flood the financial system with funds to prevent it from seizing up.

The result: a seismic shift in the financial industry, with some of Wall Street's biggest names disappearing.

"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."


Shares of Morgan Stanley and larger rival Goldman fell as much as 43 percent and 27 percent respectively, even after both reported better-than-expected quarterly earnings on Tuesday.

That stoked talk Wall Street's two surviving investment banks may have to join up with a commercial bank to survive.

"I'm assuming that Goldman Sachs and Morgan Stanley are lining up dancing partners. They don't want to be ... this week's victim," said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.

The dance music picked up pace after the close of trading.

Morgan Stanley was discussing a merger with regional banking powerhouse Wachovia, the New York Times reported. CEO John Mack got a phone call from Wachovia on Wednesday but is also pursuing other options, the paper said.

"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 said. Potential suitors include Citigroup, JPMorgan, Wells Fargo and HSBC, they added.

"Everything is for sale in the banking world these days," said Ralph Cole, a portfolio manager at Ferguson, Wellman Capital Management in Portland, Oregon. "Washington Mutual should be shopping itself."

In Britain, top mortgage lender HBOS Plc struck an all-stock deal with Lloyds TSB to create a 28 billion pound ($50 billion) mortgage giant.


The White House said it was "concerned about other companies" while the U.S. presidential candidates struck populist tones, with John McCain blasting Wall Street's "casino culture" and Barack Obama stressing protection for mom-and-pop investors.

The objects of their ire were glued to their trading screens. In the capital of the hedge fund industry, Greenwich, Connecticut, an industry conference for 500 people had 200 empty seats.

"A lot of people who are seeing massive red ink and are suffering the most are not here," said Jean de Bolle, the chief investment officer at Byron Advisors.

The cost of protecting Morgan Stanley's and Goldman's debt spiked, reflecting investor fears their debt issues are no safer than junk bonds.

"The credit crunch and credit contraction is intensifying," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. "The action in Morgan Stanley in light of what was better-than-expected numbers last night is disconcerting."

Goldman spokesman Lucas van Praag said the drop in his company's share price was "the result of completely irrational fear and is not based on any fundamentals."

Morgan Stanley's Mack blamed short sellers, or investors who bet on falling stock prices, saying in an internal memo: "We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."


In the latest example of regulatory action with little apparent effect, the U.S. Securities and Exchange Commission curbed short-selling.

"Seems like the SEC is a day late on the rule ... Morgan Stanley is clearly in the short-sellers' sights," said Andrew Brenner, senior vice president at MF Global in New York.

New distress signals had popped up earlier. The cost of borrowing overnight dollars spiked above 10 percent, indicating a deep lack of trust in the interbank lending market.

The HBOS merger talks underscored how quickly authorities around the world are ditching long-held beliefs about free markets as they struggle to counter the credit crunch.

Lloyds was previously blocked from buying a smaller mortgage bank, and the British government shocked investors by taking over troubled bank Northern Rock in February -- the country's first major nationalization since the 1970s.

U.S. authorities already have spent $900 billion to prop up the financial system and housing market. Authorities may get much of that money back -- if asset prices do not slide further.

The AIG rescue came just over a week after the bailout of 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.

Two legendary firms bit the dust over the weekend. Lehman Brothers Holdings Inc filed for bankruptcy and Merrill Lynch & Co CEO John Thain struck a deal to sell out to Bank of America Corp.

"Thain at Merrill Lynch did a very smart thing ... in keeping shareholders from being swallowed up by this vortex," said Jeffrey Gundlach, chief investment officer at bond manager Trust Company of the West in Los Angeles.

(Additional reporting by Svea Herbst-Bayliss, Jon Stempel, Jennifer Ablan, Joseph Giannone, Jeffrey Hodgson and Kevin Plumberg; Editing by Maureen Bavdek and Ted Kerr)

UPDATE 1-Singapore's GIC says to explore Morgan Stanley

Thu Sep 18, 2008

By Saeed Azhar

SINGAPORE, Sept 18 (Reuters) - The Government of Singapore Investment Corp (GIC), one of the world's biggest sovereign funds, said on Thursday it will explore investing in Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) if it is approached.

"GIC explores all opportunities when approached," said Jennifer Lewis, a spokeswoman for the Singapore state fund, in an email when asked if the fund is considering an investment in the U.S. investment bank.

A Morgan Stanley spokesman in Hong Kong declined to comment if the U.S. bank has approached GIC for investment.

GIC, which rarely comments on its investment plans, has been active recently along with other highly-secretive funds in Asia and the Middle East in buying stakes in Western banks such as Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz).

GIC's Chairman Lee Kuan Yew said earlier this year the fund could invest in more banks in the United States and Europe if it gets the chance, as it looks for long-term returns.

GIC says it manages well above $100 billion but many analysts estimate the figure is closer to $300 billion, with Morgan Stanley having said it is the world's third-biggest state fund.

Traditionally GIC, which manages the central bank's reserves and operates like an institutional fund, only buys minority stakes in companies and avoids taking controlling stakes, unlike its sister fund Temasek Holdings [TEM.UL].

The comments came after news reports emerged that Morgan Stanley may be in merger talks with U.S. bank Wachovia (WB.N: Quote, Profile, Research, Stock Buzz) to escape the worsening credit crunch.

Shares of Morgan Stanley and bigger rival Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) (GS.N: Quote, Profile, Research, Stock Buzz) fell as much as 43 percent and 27 percent respectively, even as both reported better-than-expected earnings [ID:nN17320092].

Manu Bhaskaran, a partner at U.S.-based advisory group Centennial, said such an investment was worth examining given the global scale of banks such as Morgan Stanley.

"The challenge is to look at the downside," said Singapore-based Bhaskaran. "If you can the cap downside then you are getting into a very good franchise."

Sovereign funds invested $25.5 billion so far this year to buy stakes in global firms such as Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz), up 66 percent from a year earlier, according to Thomson Reuters data.

These state-backed funds took part in 22 deals, of which 10 deals worth $9.1 billion involved Singapore's two sovereign funds, Temasek and GIC, according to data up to Aug 28. For a table please click on [ID:nSIN64789].

Sovereign funds, which are estimated to hold assets worth as much as $3 trillion, have ballooned in recent years as large Asian exporting countries such as China, and oil-rich nations such as Abu Dhabi and Russia, started putting part of their currency reserves into investment vehicles. (Editing by Neil Chatterjee)

HSBC cited as possible Morgan Stanley suitor: report

Wed Sep 17, 2008

SINGAPORE (Reuters) - London-based bank HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz) has been cited as a possible buyer of U.S. investment bank Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), broadcaster CNBC reported.

CNBC said according to unnamed sources, Morgan Stanley is in talks to possibly be acquired by China's CITIC Group, though no deal was certain.

"Morgan Stanley's senior management has been in talks with a number of potential buyers, and a deal becomes more likely as the investment bank's stock -- which plunged more than 24 percent Wednesday -- declines further. London-based HSBC has also been cited as a possible suitor for Morgan Stanley," CNBC reported on its Website.

Spokesman for both Morgan Stanley and HSBC in Hong Kong declined to comment on the report.

(Reporting by Lincoln Feast)

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