'White knight' HSBC is mulling £40bn bid for Morgan Stanley

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HSBC is weighing a possible $75bn (£40bn) bid for Morgan Stanley, stepping in as a white knight after the dreadful pounding the Wall Street bank has suffered in the past week.

HSBC is weighing a possible $75bn (£40bn) bid for Morgan Stanley, stepping in as a white knight after the dreadful pounding the Wall Street bank has suffered in the past week.

Sources within the bank say that Sir John Bond, HSBC's chairman, is being pressed by senior directors of the group's investment banking division to declare his hand as speculation mounts about Morgan Stanley's future.

Sir John has made clear his desire to develop HSBC Investment Bank, making a number of key appointments, including the former Morgan Stanley star John Studzinski.

Although Sir John had stated he wanted to grow the investment bank organically, senior colleagues believe this is too good an opportunity to miss. They point out that Morgan Stanley also owns a significant US retail business in Dean Witter, owner of the Discover card. This would complement HSBC's US retail business, which includes the consumer finance group Household and New York bank HSBC Republic.

Morgan Stanley's chairman, Philip Purcell, has been under fire since a management shake-up backfired last week.

With Morgan Stanley's senior management trying to shore up support from employees and clients, Wall Street is speculat-ing about whether the world's second-largest securities firm will remain independent.

As well as HSBC, Bank of America and JP Morgan Chase are both thought to be serious contenders if the bank does end up on the block. However, both US banks would have anti-trust problems if they were to bid for Morgan Stanley.

In a research note on Thursday, Wall Street analyst Richard Bove said the investment bank's turmoil "begs for a white knight to come forward and rescue this company".

HSBC would not make an aggressive move. It would consider an offer only with the full agreement and support of Mr Purcell and his board.

The battle between those loyal to Mr Purcell and a rebel group of eight senior former executives intensified last week. Zoe Cruz and Stephen Crawford - who were promoted to replace Morgan Stanley's president Stephan Newhouse, who quit on Friday after being demoted - were trying to gather signatures from employees supporting Mr Purcell. They were planning to send the letter to the rebels, who are led by former chairman Parker Gilbert and the bank's ex-president, Robert Scott.

The bank has managed to retain Joseph Perella, the legendary deal maker, by promoting him to vice-chairman last week.

While there are plenty of critics of Mr Purcell, the business of ousting him is a difficult one. Some 75 per cent of Morgan Stanley's directors would have to vote against him. The board includes Sir Howard Davies, former chairman of the Financial Services Authority, and Laura D'Andrea Tyson, who runs the London Business School.

Under Morgan Stanley's corporate make-up, the rebels cannot call an extraordinary general meeting to force a vote on Mr Purcell's leadership and must wait until the annual general meeting next year. Mr Purcell promoted Ms Cruz and Mr Crawford and forced out critics including Vikram Pandit, head of institutional securities, just two weeks after this year's annual meeting.