Anxious to avoid the cruel fate of onetime rival Lehman Brothers Holdings (LEH), Morgan Stanley (MS) and Goldman Sachs (GS), the only two independent investment banks still standing, have been looking for commercial banks with which to merge in order to stanch the bleeding in their shares. On Sept. 18, Morgan's shares were down 39.4% from their closing price of $37.23 on Sept. 12, before the Lehman failure, while Goldman's stock had lost almost 30% of its value.
The crisis of confidence in Wall Street financial institutions that made risky bets on mortgage-backed securities has all but immobilized efforts by investment banks to raise capital to bolster their balance sheets for inevitable further asset writedowns. That has prompted the teetering investment banks to seek protection in the comfort of cash deposits that constitute the relative strength and stability of commercial banks like Wachovia (WB). During the weekend of Sept. 13 and 14, Merrill Lynch (MER) watched Lehman's frantic efforts to find a white knight come to naught and, reading the tea leaves, quickly ran for cover by selling itself to Bank of America (BAC). However much less exposed they may be to toxic financial derivative products, Goldman and Morgan know they could be next amid investor concerns about their future access to capital.
The betrothal of investment and commercial banking under one roof isn't new. Chase Bank acquired JPMorgan in 2000 to form JPMorgan Chase (JPM). With the escalation of the financial crisis to a more frenzied pitch, however, it has started to look like a series of shotgun weddings.
Talking to China
Morgan has reportedly been discussing with China Investment Corp. the possibility of China's relatively new wealth fund increasing its stake in the New York investment bank from the $5.6 billion stake it took in Morgan in December.
But more advanced talks between Morgan and Wachovia, which is struggling with its own exposure to mortgage defaults, have caused some critics to scoff at the notion that the Charlotte (N.C.) bank has anything to offer Morgan in terms of shoring up either its access to capital or investor confidence. As of June 30, roughly $7 billion, or 5.78%, of Wachovia's $122 billion portfolio of option Adjustable Rate Mortgages was in default, says Kevin Fitzsimmons, an analyst who covers the bank for Sandler O'Neill & Partners in New York. Compared with its peers, that's a big percentage for overall mortgage defaults and it continues to grow, he adds.
Given Wachovia's focus on preserving the cash it has and generating new capital and Morgan Stanley's liquidity problems, Fitzsimmons says he doesn't see the logic of putting them together, especially in the current market environment. "[A merger] would definitely make them bigger, but I struggle to see how it would make them better," he says.