Morgan Stanley in talks

Morgan Stanley topped the list of major financial companies scrambling to find a buyer as its shares tumbled another 35 per cent, while central banks rushed in $180 billion in extra liquidity to calm panicked stock and money markets.

Morgan Stanley was in deal talks with US regional banking powerhouse Wachovia Corp, and negotiations advanced to a more formal stage, a source familiar with Morgan's plan said yesterday.

Morgan Stanley and larger rival Goldman Sachs Group Inc, the largest surviving independent Wall Street investment bank, are facing concern that the credit crunch could constrict the short-term funding on which they've traditionally relied. The deposit base of a commercial bank could be a more stable alternative, analysts say.

"While Morgan Stanley's issue in the markets is concern over its short-term funding, the merger would not create new deposits; the majority of the combined company would still require market-based funding," said Merrill Lynch analyst Edward Najarian in a research note.

"Thus, it is difficult for us to perceive a strategic benefit for Morgan Stanley, which would be merging with the weakest of the five major US banks, and the bank with the most credit risk relative to its tangible capital," he added.

The No. 2 US investment bank, whose shares are down about 67 per cent this month, has also approached Chinese sovereign wealth fund China Investment Corp about boosting its stake, the source said, following a $5 billion investment late last year.

At the same time, major trust banks' shares sank on concern about potential losses in their investment portfolios. State Street Corp was down 34 per cent, leading the decline, with Bank of New York Mellon sliding 13 per cent.

Morgan Stanley stock was off $8.21 to $13.54, while Goldman dropped 20 per cent to $91.19, on growing concerns about the viability of the investment bank business model. Also, the cost of insuring Morgan Stanley debt against default rose.