Morgan Stanley in merger talks with banks

Morgan Stanley is reportedly seeking protection from the financial turmoil on US markets by entering talks with Wachovia Corp and the Chinese state investment fund.

Morgan Stanley, one of just two remaining independent investment banks on Wall Street, was reportedly seeking protection from the financial turmoil on US markets by entering talks with Wachovia Corp and the Chinese state investment fund on Thursday.

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Morgan Stanley was in talks with China Investment Corp (CIC) to sell it a 49-per cent stake in the firm, Bloomberg financial news reported on Thursday citing insiders familiar with the talks. CIC already controls 10 per cent of Morgan Stanley's stock.

The investment bank was reportedly also in merger talks with fourth-largest US bank Wachovia and others.

The bankruptcy of investment bank Lehman Brothers Holding Inc and the government takeover of insurance giant American International Group Inc (AIG) have sent stocks plummeting amid investor fears about the health of the financial sector on losses related to subprime mortgages.

On Wednesday Morgan Stanley and Goldman Sachs Group Inc suffered their worst ever drops amid concerns they might not be able to survive the credit crunch on their own. In morning trading on Thursday, Morgan Stanley lost a further 10 per cent and Goldman Sachs lost 8 per cent.

Washington Mutual, the largest US savings and loan bank, also appeared to be in trouble, and analysts speculated about a possible takeover by a rival, such as HSBC, Citigroup, JP Morgan Chase or Wells Fargo. The bank's shares were down 12 per cent in morning trading.