Investors say Morgan Stanley not another Lehman

By Dan Wilchins - Analysis

NEW YORK (Reuters) - For U.S. authorities watching from the sidelines as Morgan Stanley struggles with doubts about its survival, letting the investment bank fail is not really an option.

While near panic about the No. 2 independent investment bank's future wracked stock and bond markets this week, a person familiar with the matter said the government is unlikely to allow Morgan Stanley to fail and would instead engineer some sort of sale or bailout.

The bank's share price has fallen some 70 percent over the last week and potential ratings cuts are looming, spurring many to make comparisons to Lehman Brothers Holdings Inc's (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) final days.

But shockwaves have been felt throughout the financial system since Lehman filed for bankruptcy on September 15 after regulators refused to help other banks buy it, an experiment U.S. authorities cannot afford to repeat.

A person close to Morgan Stanley said: "The government is persuaded that this is where they have to draw the line."

Analysts view this assessment as sensible.

"You can't possibly allow Morgan Stanley to go. The unrelenting pessimism and absence of confidence that we've seen for the last two weeks would get worse," said Michael Holland, who oversees more than $4 billion of assets at Holland & Co LLC in New York.

But some analysts say Morgan Stanley does not need any sort of bailing out at the moment. On Tuesday, it is expected to close on the sale of a 21 percent stake to Japan's Mitsubishi UFJ Financial Group Inc (8306.T: Quote, Profile, Research, Stock Buzz) for $9 billion.

THE AIG EXAMPLE

But it is also becoming clear throughout the credit crisis that seemingly stable financial firms can collapse quickly.

"As we've seen with Bear Stearns and Lehman, once the fear virus has infected the story, it is tough to shake," David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller, said in a research note.

The fear has already had some affect on Morgan Stanley. The company has in recent weeks lost at least 25 percent of its prime brokerage clients, a key source of profits for the company.

If the firm does come under further pressure, there are myriad reasons for the United States to consider a rescue as it did with American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), which teetered on the verge of bankruptcy before receiving an $85 billion loan facility from the government, followed by another $38 billion earlier this week.

For example, prime brokerage, which processes trades for hedge funds and finances their positions, is still a big business for Morgan Stanley even after client departures. If Morgan Stanley failed, billions of dollars of prime brokerage client assets would be tied up for months, hobbling a huge swathe of the world's hedge funds, a fund manager said.

Morgan Stanley may seem to be teetering as its share price hovers below $10 and the cost of protecting its debt against default surges.  Continued...