Wednesday, September 17, 2008

Morgan Stanley considers merger with Wachovia

This is also from The New York Times:

Morgan Stanley, one of the two last major American investment banks, is considering a merger with Wachovia or another bank, according to people briefed on the discussions.

Morgan Stanley’s chief executive, John J. Mack, received a telephone call on Wednesday from Wachovia expressing interest in the Wall Street bank. Morgan Stanley is considering other options as well. Other banks have also expressed interest in Morgan Stanley.

The talks are preliminary and no deal may emerge, these people cautioned. But if one is reached, it would mark the end of Morgan Stanley, one of the descendants of the original J. P. Morgan & Company.

Morgan Stanley, whose stock plunged sharply on Wednesday, would become the third major investment firm to fold amid the credit crisis. Lehman Brothers filed for bankruptcy on Monday, while Bank of America agreed to buy Merrill Lynch for about $50 billion. In March, JPMorgan Chase agreed to buy Bear Stearns at the urging of the government, as that securities firm teetered on insolvency.

Wachovia has also suffered badly over the past year, and many believed that it was seeking some merger partner. The firm has already retained Goldman Sachs to explore potential options, including a sale.

Earlier this year, Morgan Stanley approached Wachovia about a potential deal, but the North Carolina bank demurred, a person briefed on the matter said.

First, it is interesting that Goldman Sachs is working on the merger between Morgan Stanley and Wachovia. Goldman Sachs is also placing Washington Mutual on auction.

Anyways, here is the one-year stock chart for Wachovia:

Looking at all the stock charts from Wachovia, Washington Mutual, Merrill Lynch, and even American Income Group, they have all plummeted through 2008. Ever since the subprime housing collapse, these companies have been able to shield themselves from the subprime losses and write-downs, either by shifting profits from one division to another, suspending dividends, cutting branches, or slashing payrolls. They have reported the subprime losses and write-downs all along, but have countered them with cost-cutting efficiencies. And there was always the optimistic talk that we were turning the corner on the subprime mortgage mess. If anything, these past three days have shown us that we are deep into the subprime mortgage mess. The banks and financial institutions have engaged in all the cost-cutting efficiencies, and suspended dividend payments, and they are still seeing a red sea of write-downs and subprime mortgage losses that are still on the books. Lehman Brothers--gone! Merrill Lynch--gone! Bear Stearns--gone! American Income Group--taken over by the U.S. government! Washington Mutual--on the auction block! And now Wachovia will soon be gone, as it may become merged with Morgan Stanley.

There is this huge shakedown taking place in the financial industry and Wall Street. With so much bad debt sitting on the books of these financial corporations, banks are afraid of loaning money to other banks due to the fear of how much subprime debt do these banks have? It is why the Dow fell 450 points today, even as the U.S. government took control of AIG, or even as the Federal Reserve pumped $70 billion into the financial system on Tuesday. Wall Street is gripped with fear--which is the next bank that is going to fail? Investors have no confidence in the financial market. Look at this New York Times story on today's 450-point drop by the Dow:

Investors, seeking security in a market that has so far refused to stabilize, poured money into ultra-safe government notes, driving the yield on short-term Treasury bills to the lowest levels in 50 years. The moves meant that investors were willing to accept virtually zero return on their money in exchange for an investment that would not yield a loss.

“The positive impact of these government fixes, rescues and bailouts clearly are wearing off,” Mr. Yardeni said. “There’s no novelty in it any more.”

In London, the benchmark FTSE 100 index closed down 2.26 percent, and indexes in Paris and Frankfurt fell more than 2 percent.

The price of gold, a traditional safety spot in turbulent times, posted its biggest single-day gain in more than three decades, rising $70 an ounce. Silver had its biggest jump since the late 1970s.

“People are basically saying that things are going on that they can’t really justify,” Sam Stovall, the chief investment strategist at Standard & Poor’s, said. “And if you can’t explain them away logically, logic says get out of the way.”

Investors are running away from the stock market and buying U.S Treasuries, which pay almost nothing in return, but are considered safe investments. Or these investors are buying up gold, which rose $70 an ounce today. And this fear is spreading throughout the world. Russia halted its stock market trading today, on concerns of declining oil prices, violence in Georgia, the collapse of Lehman Brothers, and the U.S. bailout of AIG. And now it appears that the Dow fallout is spreading to Japan:

HONG KONG (MarketWatch) -- Japanese stocks tumbled early Thursday, hit hard by worries about global financial markets and after Wall Street suffered steep losses overnight, with banks like Sumitomo Mitsui Financial Group, and real estate firms like Mitsubishi Estate Co. leading the slide. The Nikkei 225 Average lost 3.2% to 11,375.81 and the broader Topix index skidded 3.5% to 1,082.32. New Zealand's NZX 50 index fell 3.2% to 3,164.23.

How much do you want to bet that the fear of the subprime mortgage losses is spreading to the Japanese banks, and how much these banks are leveraged into the subprime loans? The fear and the lack of investor confidence in the financial institutions are spreading throughout the world. I can't say whether this is going to be a short-term effect, where by next week, there may be a return of some type of sanity in the market. Or if more banks and financial institutions start to fail, due to the subprime mortgage mess, we could see a very turbulent September of wide stock market swings. But looking at the past three days, I do not think you are going to see much investor confidence returning to the markets--perhaps not until after the U.S. presidential elections. Investors and traders may just sit out on the sidelines until the end of this year, and then next year start planning their new investment strategies.

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