Morgan Stanley in talks as fear grips financials

Morgan Stanley topped the list of major financial services firms scrambling to sell themselves as fear gripped global credit and stock markets, with former emerging markets darling Russia paralyzed.
Morgan Stanley was discussing a deal with U.S. regional banking powerhouse Wachovia , while CNBC reported that HSBC Holdings and China's CITIC Group were also eyeing the venerable Wall Street firm.
Lloyds TSB achieved a long-held ambition in Britain by scooping up the country's biggest mortgage lender HBOS in a $22 bln all-share deal timed to end a slump in its rival's shares prompted by fears about HBOS's funding
Among the possible buyers of Morgan Stanley, the Government of Singapore Investment Corp (GIC) said it would consider all possibilities, including taking a stake if approached.
A Morgan Stanley spokesman in Hong Kong declined to comment. A spokeswoman at HSBC, which this week became the world's biggest bank by market value, also declined to comment.
A senior executive at the Chinese group's CITIC Securities arm said his firm was not in any talks towards investment in Morgan Stanley. An official with the CITIC group could not be reached for comment.
With the financial landscape undergoing its most dramatic transformation since the Great Depression, potential takeovers lurked for No. 2 U.S. investment bank Morgan Stanley and weakened top U.S. savings bank Washington Mutual.
The MSCI index of Asia stocks excluding Japan fell 3.75%, while Tokyo shares were 2.22% lower. Hong Kong was especially hard-hit, with the Hang Seng index falling more than 7%.
Financial stocks in Europe were indicated to open lower, with Swiss heavyweights UBS seen down 7% and Credit Suisse down nearly 4%.
And Russian stock markets remained closed for a second day, with authorities unable to say when they would reopen.
"After the bailing out of AIG failed to reassure the market, it is difficult to imagine what could really stop the un-orderly deleveraging that is going on," French investment bank Calyon said in a Thursday note.
Panicked matchmaking followed the surprise $85 bln rescue of insurer American International Group by the U.S. Federal Reserve on Tuesday that did little to calm investors' nerve, with financial shares bludgeoned.
Shares in Macquarie Group, Australia's biggest investment bank, skidded 21% to their lowest level in more than 5 years amid funding worries.
Industrial and Commercial Bank of China, which had been the world's most valuable bank until being surpassed by HSBC on Wednesday fell nearly 14%.
"Stop The Insanity," pleaded a research note from Swiss bank UBS as U.S. financial shares appeared to be in free-fall. The U.S. stock market plunged 4.7% to a three-year low and the dollar slumped, while gold and oil soared.
Lending between big banks was essentially frozen by cash hoarding and mistrust, creating crises of liquidity and confidence. Overnight U.S. dollar lending rates have soared this week and traded as high as 8.5% on Thursday.
Japan and Australia pumped an additional $17 bln into money markets on Thursday to prevent banks from hoarding cash.
"Banks are reluctant to lend money to each other, everybody seems to sit on stockpiles of cash," said Markus Ammann, a trader at Bayerische Hypo und Vereinsbank in Hong Kong.
The AIG rescue capped a week of bailouts, bankruptcy and moves by central banks around the world to flood the financial system with funds to prevent it from seizing up.
Shares of Morgan Stanley and larger rival Goldman fell as much as 43% and 27% respectively, even after both reported better-than-expected quarterly earnings.
The cost of protecting debt in both spiked, reflecting investor fears their debt issues are no safer than junk bonds.
Morgan Stanley's Mack blamed short sellers, or investors who bet on falling stock prices, saying in an internal memo: "We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."
"The fear is who is next," said John O'Brien, senior vice president at MKM Partners in Cleveland. "It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear."