Wachovia + Morgan Stanley = Dumbest Merger in History

Last evening, a merger proposal rumored to be under discussion involving Wachovia (WB) and Morgan Stanley (MS).

Inquiring minds are considering As Fears Grow, Wall St. Titans See Shares Fall.

Even Morgan Stanley (MS) and Goldman Sachs (GS), the two last titans left standing on Wall Street, are no longer immune. To the surprise of executives within those firms, and their rivals, the stocks of these powerful companies were drawn into the crisis of investor confidence on Wednesday. Morgan Stanley, whose stock fell almost 25 percent, was considering a merger with Wachovia or another bank to help shore up its finances. Goldman Sachs stock fell almost 14 percent, and it had to rebuff rumors that it was seeking a capital infusion.

Only a day ago, Morgan Stanley defended itself from growing doubts about its future, issuing a fairly positive earnings report to ward off concerns about its health. But the fear that gripped markets after Lehman Brothers failed also enveloped the firm.

One week ago Morgan Stanley posted a ridiculous earnings estimate that only looked good because it took advantage of a financial loophole to write off the value of its debt. By the same methodology Lehman (LEH) would have has a spectacular quarter by writing down its debt, now valued at zero in bankruptcy. Continuing the excerpt:

Seeking to avoid the kind fate that led Lehman and Bear Stearns to collapse, John J. Mack, Morgan Stanley’s chief executive, made an unsuccessful attempt Tuesday evening to convince Citigroup chief executive Vikram S. Pandit to enter into a combination, according to people briefed on the talks.

“We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested. It is thinking of deals it can strike with consumer banks, like buying Washington Mutual out of bankruptcy, that would provide it with cheaper deposit funding. A Citigroup spokeswoman declined to comment.

Citigroup declined to comment but I won't. Avoiding a discussion with Morgan Stanley was probably the only sensible thing Citigroup (C) has done for years. Back to the story:

Having failed at that, Mr. Mack entered into discussions Wednesday with Wachovia and several other banks, people briefed on those discussions said. The talks with Wachovia are preliminary and no deal may emerge. All three banks declined to comment.

Mr. Schorr, the analyst at UBS, said the increase in the risk premiums investors are demanding on debt have become self-fulfilling prophecies that now operate almost entirely detached from underlying fact, a thought echoed by people inside both banks and by several investors.

“It’s all confidence, it’s not reality,” Mr. Schorr said. To be sure, Morgan and Goldman have some problems, including a parcel of troubled mortgage assets and trading and advisory businesses that are vulnerable to a slowing economy. “But that is not what is going on here,” Mr. Schorr said. “It is just a flat out squeeze that should not be able to happen. The negative feedback loop has to be somehow suspended,” he added, “but I don’t know exactly how you do that.” Goldman Sachs declined to comment.

Count Schorr among the analysts who would not know reality if reality jumped up and squirted grapefruit juice in his eye.

The takeunder of Time Warner by AOL is legendary. Arguably the AOL/TW merger marked the peak of insanity right before the dotcom bust. That merger diluted a relative strong Time Warner with a ridiculously overvalued AOL. However, neither company was ever in financial jeopardy as a result of the merger.

The proposed merger of Wachovia and Morgan Stanley  is something completely different.

In the current financial crisis to date, the strong have been merging with the weak. This has not accomplished much other than to make the relatively strong, much weaker. In contrast, a merger of Wachovia and Morgan Stanley would be a merger of the weak with the pathetically weak. Conditions are such that it is very difficult to tell who is who.

While both companies have a questionable future, a merger has a certain future: a complete collapse of the combined entity. I doubt this merger takes place.

Comments

[Kofi Bofah:]

What in the world is Wachovia Bank going to do with Morgan Stanley?

Wachovia is the Charlotte, NC bank that I have dubbed 'Whack' ovia due to its dubious decision making. Wachovia's balance sheet is loaded with toxic debt, due to heavy mortgage exposure and poorly timed acquisitions. The bank actually bought out AG Edwards brokerage and Golden West, a subprime mortgage lender at the height of the euphoria. Of course, the transactions have been severely mangled throughout the course of this debacle. I would argue that Wachovia is the most mismanaged of the large, money center commercial banks.

This is the blind leading the blind. The situation is comical.

2008 Sep 18 01:46 PM

[redeyeant:]

They are hoping they will become 'too big to fall' after merge, and Fed have to bail them out.

2008 Sep 18 03:22 PM

[Comic Book Guy:]

Worst Merger Ever

2008 Sep 18 10:23 PM

[User 265449:]

None of you...even this so-called blogger/crappy writer know you are talking about. Have you looked at WB balance sheet? Well, I have looked at it and its strong. WB does not hold any mortgage back securities like other firms. WB owns the mortgage, so they have a lot of flexability. Also, if you do the math...if you any of you know how, 10 billion out of 500 billion for problematic loans is only 2 percent. If they owned MBS's, then they could hold or sell...not a good thing...especially since the SEC screwed everyone in the market to market accounting rule 475...not to mention getting rid of the up tick rule. MS and GS will not last without a commercial bank with deposits. If they don't merge, I hope they both fail. WB does not need MS...WB has a larger advisor firm and better platform. At the end, MS needs WB or another bank for deposits. All of you are morons and I'm sure you don't understand anything financial or market related...mainly this stupid writer. The last 4 days, more morons have written crap like this and one day, you will be held accountable for writing bad information. Keep thinking you are right and keep loosing money...I'm laughing at everyone loosing money every day....like the writer of this article and all of you morons who think you know something because you watch TV or read blogs.

2008 Sep 18 10:46 PM

[helplessobs...:]

User is right in that , WB owns those 300K+ Golden West Financial mortgage loans. This provides a lot of room to make the best of the situation for the borrower and the bank. CEO Steel says they have a public data base detailing each loan so investors can pick and choose before buying any of them. Want to invest in California real estate, check out the listing.

2008 Sep 19 12:25 AM

[jim collins:]

Tips for ignoring a post :
1. Using the word "moron" or some variation thereof
2. Spelling the word "losing" as "loosing"

2008 Sep 27 05:58 PM