Morgan's merger plan with Wachovia fails

Wachovia Corp, the fourth-largest US bank, fell as much as 13 per cent as investors speculated that any chance of a merger with Morgan Stanley is now dead.

The Federal Reserve yesterday approved Morgan Stanley’s bid to become a bank holding company, enabling the New York-based investment firm to expand its ability to attract consumer deposits.

“It doesn't look like Wachovia will be buying anybody,” said Steve Gutch, research director at Clover Capital Management in Rochester, New York, which manages $2.8 billion.

“Morgan Stanley was being forced into stronger arms because they didn't have a stable funding base, but this new investment from Mitsubishi and the new regulations give them a little stability.”

Chief Executive Officer Robert Steel is rebuilding investor confidence after the lender reported deficits totaling $9.5 billion over the past two quarters because of writedowns of sub-prime-related securities and mounting losses on home loans. Combining with Morgan Stanley could have created the largest US retail brokerage and bolstered Wachovia's investment bank, compensating for mounting losses on its $122 billion of option adjustable-rate mortgages.

“Buying Morgan Stanley would have been a coup for Bob Steel. I think it was his home run play,” said Joseph Gordon, president of Gordon Asset Management in Durham, North Carolina. “Now they have to go back to fundamental blocking and tackling.”

Chances of Markdowns: Stifel Nicolaus & Co Inc cut its rating today on Wachovia to “hold” from “buy”, noting the recent rally was “too much, too soon”. Wachovia may face large writedowns if it sells option ARMs under the federal government's plan to buy up to $700 billion in real-estate loans and securities, analyst Christopher Mutascio said in a report.