By Tony Munroe and Will Waterman
HONG KONG/LONDON (Reuters) - A radical U.S. plan to mop uptoxic mortgage debt and a spreading ban on short-selling drovebank stocks up as much as 40 percent on Friday as urgent talksover rescue takeovers in the sector continued.
As the authorities brought out the big guns to tackle thefinancial crisis, U.S. investment bank Morgan Stanley continuedtalking to Wachovia and other banks about a merger, whilediscussing a possible increased investment from China'ssovereign wealth fund, sources familiar with the plans said.
HSBC Holdings walked away from a $6.3 billion (3.5 billionpounds) deal for control of Korea Exchange Bank, fuellingspeculation it may be turning its attentions to one of itsembattled rivals in the West instead.
And the Eurozone's largest bank, Spain's Santander,declined to comment on a media report it was eyeing Bank ofIreland, which has been pummelled by a property market slump athome.
After the Financial Services Authority imposed a four-monthban on short selling financial stocks on Thursday, the U.S.Securities and Exchange Commission followed suit on Friday withan immediate ban for an initial 10 days. French regulator AMFsaid it was also talking to other Eurozone regulators aboutmarket dealings, leading to expectations that the shorting banwould snowball.
Meanwhile the world's central banks redoubled their effortsto lubricate the seized up money markets. Japan, Australia,India and Indonesia pumped in $42 billion after the U.S.Federal Reserve co-ordinated a $180 million package a dayearlier.
In Europe, there were signs that the stress was easing. Thecost of borrowing dollars overnight fell back towards the Fed's2 percent target, and three-month borrowing costs slid. TheBank of England offered $40 billion to banks, but only half ofit was taken up.
TOXIC DEBT PLAN
Thursday's proposals by Washington to draw the poison frombanks' mortgage assets and the first of the short-selling banshad an immediate and dramatic effect.
U.S. stocks clocked their biggest percentage gain in sixyears late on Thursday, powering a rally in the dollar andpushing oil prices higher, and on Friday Asian and Europeanmarkets picked up where New York's left off.
The price of gold and government bonds, traditional safehavens in times of turmoil, both slipped back.
U.S. Treasury Secretary Henry Paulson and Federal ReserveChairman Ben Bernanke plan to work through the weekend withCongress on a plan to deal with the toxic bank assets that havebeen choking the financial system for a year.
"This is a more substantial and systemic solution than thead hoc interventions we have seen in recent days," said DariuszKowalczyk, chief investment strategist at CFC Seymour in HongKong.
"At present confidence is the most important factor, andthis will only be maintained if the rescue plans are deliveredon both sides of the Atlantic," said Andrew Turnbull, seniorsales manager at ODL Securities.
Stock markets did not wait for details.
The MSCI index of regional shares excluding Japan was up 7percent, and Tokyo stocks ended up 3.8 percent. The Shanghaiindex roared 9.5 percent higher after the Chinese governmentstepped in with a reform package to halt a 69 percent slidefrom last October's record high.
In Europe, all the continent's major markets jumped inearly trade. The pan-European FTSEurofirst 300 was up 6.3percent, while some of Europe's biggest banks, UBS, HBOS,Lloyds TSB and Royal Bank of Scotland were up between 29 and 47percent.
MORGAN STANLEY
Sovereign wealth fund China Investment Corp, MorganStanley's largest shareholder, with a 9.9 percent stake itbought for $5 billion in December, was in talks that could seeits stake climb to as much as 49 percent, sources familiar withthe matter said.
Beijing is wary of adding to its Morgan Stanley holding,given that its existing holding is carried at a steep loss --the whole bank was only worth $24 billion at Thursday's close.An unidentified CIC official told the Xinhua news agency thatan increase in the stake would face U.S. political obstacles.
Sources familiar with the plans said Morgan Stanley'sparallel discussions with Wachovia began Wednesday night with aproposal from Wachovia CEO Robert Steel to Morgan Stanley CEOJohn Mack and have since reached a more formal stage.
Morgan Stanley declined to say it was in talks, but aspokeswoman confirmed it was "focused on solutions" to addressits falling stock price.
GOVERNMENT ACTION
A U.S. fund to deal with bad mortgage-related assets wouldbe similar to the Resolution Trust Corp, which was set up toclean up bad debts from the savings and loan crisis in the late1980s at a $400 billion cost to taxpayers.
"We talked about a comprehensive approach that will requirelegislation to deal with illiquid assets on financialinstitutions' balance sheets," Paulson told reporters.
According to two Congressional aides, he has been shoppingaround a plan to create the fund.
Rep. Barney Frank, who is chairman of the House FinancialServices Committee, said there was concern that establishing aformal entity to buy the assets would take too long.
"I think it will start to provide a floor to asset valuesand allow institutions to work through this in a systematicmanner. They won't have to rush into the arms of suitors toavoid collapsing," said Haag Sherman, co-founder and managingdirector of Salient Partners in Houston.
In addition, New York's Attorney General Andrew Cuomo begana wide-ranging probe into possible illegal short-selling in thestocks of Wall Street firms such as Morgan Stanley and rivalGoldman Sachs Group Inc.
At one stage on Thursday, Morgan Stanley's stock dropped asmuch as 42 percent and Goldman as much as 25 percent, adding toseveral days of huge declines that have wiped out tens ofbillions of dollars of market value. However, after news of themoves by authorities in the U.S. and UK, they were both tradinghigher in after-hours trade.
Investors are questioning whether the investment bankingmodel is doomed after the bankruptcy filing earlier this weekof Lehman Brothers Holdings Inc and the proposed sale ofMerrill Lynch.
There has even been speculation that Goldman, the mostpowerful investment bank and once seen as untouchable, may bein need of a partner, possibly a retail bank.
(Additional reporting by Kevin Plumberg; Editing by JeanYoon/Andrew Callus)
