Morgan Stanley Considers Finding a Merger Partner

Morgan Stanley officials are weighing whether the firm should remain independent or merge with a bank given the recent turbulence in the company's stock, CNBC has learned.

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As of late yesterday (Tuesday) Morgan officials were not in merger discussions, according to people close to the matter. But senior people at Morgan concede that further zig-zags in the company's stock price could and possibly will force the company to change course and seek a merger partner, probably a well capitalized bank.

Morgan Stanley CEO John Mack wants to avoid the mistake made by Lehman Brothers CEO Richard Fuld, who brushed aside buyout offers until the market crushed shares of the firm and force it into bankruptcy.

Morgan, analysts say, has a stronger balance sheet than Lehman and recently pre-announced financial results showing profits for the third quarter, and a lower than expected decline of 7.7 percent from the third quarter of last year.

But Wall Street traders are increasingly betting that Morgan might not survive--the costs of so-called credit default swaps which are insurance policies against Morgan defaulting on its bonds, shot up on Tuesday, forcing the company's pre-announcement.

For this reason, Mack is carefully monitoring the market reaction and may indeed decide to do a deal if it looks like the firm could face a liquidity crisis as traders begin to pull funding from the firm.

"Mack isn't going to wait," said one person familiar with his thinking. "If he sees the writing on the wall, he's going to do something".