Morgan Stanley is less interested in a merger with the banking group Wachovia Corp, according to a person close to the negotiations. The source added that the acquisition is no longer Morgan's first priority, although talks with other parties continue. The bank held a board meeting over the weekend to discuss Wachovia and the possibility that China's sovereign wealth fund China Investment Corp could increase its stake in Morgan Stanley, according to sources familiar with the situation.
Morgan Stanley declined to comment on the talks but did say in a statement that the new status would give it "flexibility and stability to pursue new business opportunities." The head of global mergers at a US investment bank claimed: "In some ways this makes it easier for them to buy a retail bank, but they may argue that this makes them self-sufficient and they don't need to buy a bank now." "But they can't raise deposits fast enough organically to stabilise their problems, it has to come through M&A," said the banker, who declined to be identified.
Goldman intends expanding its deposit base by acquiring deposits wholesale from other banks, particularly those in distress, said the firm's spokesman Lucas van Praag. He said that the bank began to feel that it needed to consider something like yesterday's move after the government-financed fire sale of another investment bank, Bear Stearns, to JPMorgan in March, and the events of the past week accelerated this thinking.
"Last week the markets were looking for a 'belt and braces' approach to safety and soundness ? now we have the central bank as our regulator and permanent access to the lender of last resort," he said. Goldman saw its shares plunging as much as 45 per cent in the first four days of last week as even once seemingly untouchable Wall Street firms appeared vulnerable to the financial crisis. Its stock partially recovered amid news of a planned US$700 billion (Dh2.57 trillion) bailout of the US financial system by the government and a ban on short selling of financial stocks.
To provide increased liquidity to the companies while they go through the transition, the Fed agreed to lend to the firms' broker-dealer subsidiaries on the same terms as the Fed discount window for banks. The Fed said it was making the same collateral deals available to the broker-dealer subsidiary of Merrill, which is being acquired by Bank of America. "It creates a perception of greater safety and supervision. It really rationalises the regulatory system. It should be good for both Goldman Sachs and Morgan Stanley," said Chip MacDonald, mergers partner at law firm Jones Day. "It gives them better sources of funds through a commercial bank subsidiary."
The approval by the Fed came at the request of Goldman and Morgan, according to a source familiar with the application. Goldman Sachs also announced that it would move assets from a number of businesses into an entity called GS Bank USA that would have more than $150bn in assets, making it one of the ten largest banks in the United States. Under a commercial banking model Goldman and Morgan will be able to take deposits which during this shaky financial environment are considered a stable source of funding.
Their ability to take risks will not only be more thoroughly questioned but also be more measured because regulators will require stringent capital levels relative to the risks they take. They will also be required to maintain managerial and operational soundness and be subject to a strict regulatory ratings system. * Reuters
