Morgan Stanley Executives Continue to Weigh Options

Firm Said to Be Eying Merger With Wachovia, Increased Investment From China Fund

NEW YORK, Sept. 18 -- Morgan Stanley executives continued Thursday to weigh several options for the firm, including a combination with Wachovia and an increased investment from China's sovereign wealth fund.

The 73-year-old firm also is examining the prospect of staying independent, a choice that may be more viable now that regulators have pledged to step up pressure on manipulative trading by short sellers who spread false rumors or conspire to drive down a stock.

The only option Morgan Stanley has officially ruled out thus far is a combination with Citigroup. The banking giant yesterday called Morgan Stanley Chief Executive Officer John Mack to offer help, after shares of Morgan Stanley plunged and the credit derivative market began pricing in a potential debt default by the firm. But executives at both firms agreed that a combination did not make sense, according to a source familiar with the discussions.

The ongoing credit crisis has raised concerns among investors about whether Morgan Stanley and Goldman Sachs, the last of the large, stand-alone investment banks, could continue to get the financing they need to fund their businesses.

At a town hall-style meeting this morning at Morgan Stanley's headquarters, Mack told employees that the markets had become irrational, and he offered assurances that the firm had adequate capital and the confidence of clients. He said the firm would explore all options and do what was best for employees and shareholders.

Among the options he discussed at the hour-long meeting was the idea of selling a larger stake in the firm to China Investment Corp., which took a $5 billion stake in Morgan Stanley in December.

Talks with Wachovia, meanwhile, have included discussions of a "good bank-bad bank" structure in which the companies would pool their most tainted investments in a "bad bank" where they could be unwound slowly to preserve as much of their value as possible.

Shares of Morgan Stanley closed up more than 3 percent to $22.55.