Morgan Stanley, WaMu and HBOS Struggle for Survival

The credit crisis and the decline in financial stock prices to their lowest levels in several years have forced numerous banks to seek refuge in merging with larger institutions, allowing financial giants to cheaply acquire their former competitors.

The struggle for survival has prompted investment bank Morgan Stanley to search for a partner, with Washington Mutual and British bank HBOS also in negotiations for a merger. Just a day after U.S. authorities rescued American International Group, one of the world’s largest insurance companies, from bankruptcy with an emergency loan, stock prices on Wall Street plummeted to their lowest levels in three years. Financial institution stocks, particularly Morgan Stanley and Goldman Sachs, are under the greatest pressure as investors doubt their ability to survive as independent investment banks without the support of a commercial bank in these crisis conditions. As a result, Goldman’s stock price fell by about 14% yesterday, while Morgan’s dropped by more than 24%.

“These are visible consequences of changes shaking the foundations of the current global financial system,” says Frank Husic, co-owner of Husic Capital Management. Immediately after the closing of Wall Street, it was reported that Morgan Stanley, the second-largest American investment bank, had begun negotiations to merge with powerful regional bank Wachovia. However, there are other options, says John Mack, Morgan’s CEO. British bank HSBC, Chinese state financial conglomerate CITIC group, and the Government of Singapore Investment Corp (GIC) are also interested.

Washington Mutual (WaMu), shaken by massive losses in the real estate market, has offered itself to potential partners – Citigroup, JPMorgan, Wells Fargo, and British HSBC banking group, which this week became the largest bank in the world by market capitalization. In Britain, Lloyds TSB has offered $22 billion for HBOS, the largest British mortgage bank. Analysts say this would be a last-minute rescue for HBOS, given the enormous problems facing the bank.

Thus, HBOS could avoid the fate of American mortgage banks Fannie Mae and Freddie Mac, which U.S. authorities nationalized about ten days ago due to impending bankruptcy. Since the beginning of the year, Bear Stearns and Lehman Brothers have gone bankrupt, while Merrill Lynch was saved through an emergency sale to commercial bank Bank of America. Thus, three of the five largest American investment banks have ‘disappeared’. The remaining two, Goldman Sachs and Morgan Stanley, want to avoid their fate.

“I am sure that Goldman Sachs and Morgan Stanley are looking for partners to dance with. They do not want to become this week’s victims of the financial crisis. In these market conditions, anything is possible, and it seems that the market wants the model of independent investment banking to disappear,” says William Larkin, director at Cabot Money Management. While some banks are desperately fighting for survival in the most dramatic transformation of the financial system since the Great Depression of the 1930s, others are reveling and choosing victims to ‘swallow’. “I feel like a kid in a candy store,” says Wells Fargo bank president Richard Kovacevich. (H)