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Wednesday, September 17, 2008 11:41 PM

Dumbest Merger Proposal In History: Wachovia + Morgan Stanley

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This evening, a merger proposal rumored to be under discussion involves Wachovia (WB) and Morgan Stanley (MS).

Inquiring minds are considering As Fears Grow, Wall St. Titans See Shares Fall.

Even Morgan Stanley and Goldman Sachs, the two last titans left standing on Wall Street, are no longer immune. To the surprise of executives within those firms, and their rivals, the stocks of these powerful companies were drawn into the crisis of investor confidence on Wednesday. Morgan Stanley, whose stock fell almost 25 percent, was considering a merger with Wachovia or another bank to help shore up its finances. Goldman Sachs stock fell almost 14 percent, and it had to rebuff rumors that it was seeking a capital infusion.

Only a day ago, Morgan Stanley defended itself from growing doubts about its future, issuing a fairly positive earnings report to ward off concerns about its health. But the fear that gripped markets after Lehman Brothers failed also enveloped the firm.
My Comment: One week ago Morgan Stanley posted a ridiculous earnings estimate that only looked good because it took advantage of a financial loophole to write off the value of its debt. By the same methodology Lehman (LEH) would have has a spectacular quarter by writing down its debt, now valued at zero in bankruptcy.
Seeking to avoid the kind fate that led Lehman and Bear Stearns to collapse, John J. Mack, Morgan Stanley’s chief executive, made an unsuccessful attempt Tuesday evening to convince Citigroup chief executive Vikram S. Pandit to enter into a combination, according to people briefed on the talks.

“We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested. It is thinking of deals it can strike with consumer banks, like buying Washington Mutual out of bankruptcy, that would provide it with cheaper deposit funding. A Citigroup spokeswoman declined to comment.
My Comment: Citigroup declined to comment but I won't. Avoiding a discussion with Morgan Stanley was probably the only sensible thing Citigroup (C) has done for years.
Having failed at that, Mr. Mack entered into discussions Wednesday with Wachovia and several other banks, people briefed on those discussions said. The talks with Wachovia are preliminary and no deal may emerge. All three banks declined to comment.

Mr. Schorr, the analyst at UBS, said the increase in the risk premiums investors are demanding on debt have become self-fulfilling prophecies that now operate almost entirely detached from underlying fact, a thought echoed by people inside both banks and by several investors.

“It’s all confidence, it’s not reality,” Mr. Schorr said. To be sure, Morgan and Goldman have some problems, including a parcel of troubled mortgage assets and trading and advisory businesses that are vulnerable to a slowing economy. “But that is not what is going on here,” Mr. Schorr said. “It is just a flat out squeeze that should not be able to happen. The negative feedback loop has to be somehow suspended,” he added, “but I don’t know exactly how you do that.” Goldman Sachs declined to comment.
My Comment: Count Schorr among the analysts who would not know reality if reality jumped up and squirted grapefruit juice in his eye.

Historic Merger Review

The takeunder of Time Warner by AOL is legendary. Arguably the AOL/TW merger marked the peak of insanity right before the dotcom bust. That merger diluted a relative strong Time Warner with a ridiculously overvalued AOL. However, neither company was ever in financial jeopardy as a result of the merger.

Wachovia + Morgan Stanley

The proposed merger of Wachovia (WB) and Morgan Stanley (MS) is something completely different.

In the current financial crisis to date, the strong have been merging with the weak . This has not accomplished much other than to make the relatively strong, much weaker. In contrast, a merger of Wachovia and Morgan Stanley would be a merger of the weak with the pathetically weak. Conditions are such that it is very difficult to tell who is who.

While both companies have a questionable future, a merger has a certain future: a complete collapse of the combined entity. I doubt this merger takes place.


Chinese bank CITIC interested in Morgan Stanley.
CNBC, quoting unnamed US and Chinese sources, reported that China's CITIC bank is in talks to possibly acquire Morgan Stanley. CNBC also cautioned that no deal is yet certain.

The US Federal Reserve has been encouraging the Chinese to invest in US financial institutions, the sources told CNBC, which noted that CITIC owns the largest brokerage in China.
This is a more plausible rumor but I question whether it happens either.

Mike "Mish" Shedlock
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