This story was originally published Sept. 20, 2008.
Morgan Stanley's board was expected to meet over the weekend to discuss a merger with Wachovia Corp, the Wall Street Journal reported on Saturday.
A deal could include sovereign wealth fund China Investment Corp taking a significant stake in the combined company, the newspaper said, citing people familiar with the matter.
CIC's interest may be contingent on Wachovia being able to offload some of its mortgage assets, the Journal said. The CIC discussion has been preliminary and has not been raised with Wachovia's board, the paper said.
CIC dampened speculation on Friday that it could be ready to increase its stake in Morgan Stanley as a senior CIC official was quoted by the Xinhua news agency as saying Morgan Stanley and Goldman Sachs were capable of tackling their problems on their own.
However, sources familiar with the plans told Reuters on Thursday that CIC, which bought 9.9 percent of Morgan Stanley last December, is in talks to raise its holdings to as much as 49 percent.
One roadblock to a deal between Morgan Stanley and Wachovia could be how the U.S. government's rescue plan addresses the mortgage portfolio at Wachovia, the Journal said. Other issues include price and Morgan Stanley's leverage.
In the past week, Morgan's stock plunged and its debt insurance prices surged amid fear that even large broker-dealers could not weather the current crisis. A series of moves by the U.S. government to limit short sales and to sop up toxic bank assets sparked a rally in financial shares.
The U.S. government said on Friday said it is preparing to take on hundreds of billions of dollars in bad mortgage debt from the banks' balance sheets, after curbing short selling and guaranteeing mutual funds in an effort to stabilize financial markets.
officials said Friday that Treasury Secretary Hank Paulson's plan to tackle the financial crisis gripping the country is a potential "game-changer" to the plans it has been laying out this week.