Morgan Stanley boss still in talks with Wachovia

John Mack, the chief executive of Morgan Stanley, has continued to talk to Bob Steel, the head of the US high-street bank Wachovia, about the possibility of combining their two companies, even though the immediate pressure to do a deal was lifted by the rebound in financial markets.

Morgan Stanley held a board meeting over the weekend to discuss its strategy, after a week of extraordinary pressure on the company, which at one point had seemed likely to be capsized by the turmoil in the credit markets.

After the collapse of Lehman Brothers and the fire sale of Merrill Lynch a week ago, investors jumped to the conclusion that no investment bank could survive unless it were bolted on to a retail bank whose customer deposits would give it a much more stable asset base.

Mr Steel is a former vice-chairman of Goldman Sachs who served as under-secretary to the Treasury when Hank Paulson, the former Goldman boss, became the Treasury Secretary.

He has known Mr Mack for many years, and once talked with him about joining Morgan Stanley. The pair began talking on Wednesday, when a run on the Morgan Stanley share price was threatening to trigger a full-blown crisis of confidence.

By Friday, it was being reported that up to 10 per cent of Morgan Stanley's hedge fund trading clients had abandoned the firm, although executives insisted that the company had the capital strength to withstand that part of the business disappearing entirely.

Mr Mack told employees that he would fight to retain Morgan Stanley's independence, but that all options were on the table, given the behaviour of the financial markets.

China Investment Corp, which has a 9.9 per cent stake in Morgan Stanley, was also involved in negotiations, first about taking that stake up to 49 per cent and then, later, about injecting capital into a combined Morgan Stanley-Wachovia.

There were no signs yesterday that a deal would be imminent, particularly now that Mr Mack's calls for a curb on short-selling activities have been heeded by the Securities and Exchange Commission.

Many banking executives blame short sellers, who place bets on a falling share price, for stoking a panic that ultimately enriches them handsomely if a company fails.

The SEC banned short-selling in 799 financial stocks on Friday, contributing to a giant rally in share prices.

Analysts said that the progress of Morgan Stanley's talks with Wachovia will depend on whether Friday's rally is sustained, and on the emerging details of the Treasury's plan to buy-up toxic mortgage assets, of which Wachovia is likely to be a big seller.