Morgan Stanley chief considers merger as markets dive again

John Mack, the chief executive of Morgan Stanley, was last night considering the desperate option of a merger with a commercial bank as a way of saving the firm from collapse, amid a financial panic that sent Wall Street shares plunging again and investors scurrying to safe havens.

As well as holding exploratory talks with banks, including Wachovia, one of the biggest commercial banks in the United States, Mr Mack also demanded yesterday that regulators curb short selling of Morgan Stanley stock, something he said was contributing to a downward spiral that could sink the company.

"It's very clear to me," Mr Mack told Morgan Stanley staff in an email yesterday, "we're in the midst of a market controlled by fear and rumours, and short sellers are driving our stock down."

The Dow Jones slumped 449 points to 10,610 with the sell-off accelerating towards the end of the day on concern that there will be no immediate end to a string of financial disasters – from the collapse of Lehman Brothers to the nationalisation of AIG – that has undermined confidence in the banking system. Gold prices rocketed and yields on US Treasury bonds fell to a mere 0.02 per cent – their lowest level since 1941 – amid signs of a massive flight to safety by investors.

As Morgan Stanley shares fell 25 per cent, Mr Mack was joined in his demand for curbs on short selling – made in phone conversations with the chairman of the Securities and Exchange Commission, Christopher Cox – by Lloyd Blankfein, his opposite number at Goldman Sachs, the only other independent investment bank left standing after three days of turmoil in the world's markets.

Short selling is the practice of selling a stock that you do not own, in the expectation of profiting from its decline. Earlier in the day, the SEC had promised to ban any short seller that failed to properly complete their trades, a practice known as naked shorting, where the seller fails to borrow the stock in time to give it to the buyer. The Commission was believed to be considering even more restrictions last night.

Both investment banks had set out significant liquidity reserves in financial results published on Tuesday, but that did not end questions over whether they were viable in their present form.