Sept. 18 (Bloomberg) -- Morgan Stanley, the second-largest independent securities firm in the U.S., jumped in late New York trading after members of Congress signaled that the government may create an agency to inject capital into financial companies.

The stock, which had dropped 49 percent in the last eight trading sessions, climbed 3.7 percent to $22.55 at 4:07 p.m. in New York. Goldman Sachs Group Inc., the biggest U.S. securities firm, fell 5.7 percent to $108.00 after sinking as low as $85.88 earlier in the day.

``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Senator Charles Schumer, a New York Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. ``I've been talking to them about it.''

Morgan Stanley, led by Chief Executive Officer John Mack, and Goldman tumbled the most in their history yesterday, as the deepening credit crunch fueled concern their funding sources are drying up. Lehman Brothers Holdings Inc. filed for bankruptcy earlier this week and Merrill Lynch & Co. sold itself to Bank of America Corp.

Financial companies worldwide have taken more than $517 billion in writedowns on bad debt after a drop in the real estate market undercut the value of securities based on mortgages. Investors' wariness of risky debt products spread to corporate loans and other securities.

The widening losses have shaken confidence in Wall Street firms that held the securities, as investors became concerned that because of their dependence on borrowing, they didn't have enough capital to withstand markdowns on the assets.

`Horror Show'

Unlike the Great Depression, the current crisis has unfolded in relatively benign economic circumstances, said Jim Grant, the editor of Grant's Interest Rate Observer.

``This speaks to a unique and unprecedented calamity of incompetence among people who have been making seven and eight figures each year,'' Grant said in an interview with Bloomberg Television today. ``They ought to consider just what a horror show Wall Street and its facilitators have brought us to. This is a scandal of the first water.''

As markets froze this week, Goldman Sachs and Morgan Stanley failed to mollify investor concerns with better-than-expected earnings.

Morgan Stanley, which dropped as much as 43 percent earlier today, started talks about selling a larger stake to China Investment Corp. and held talks about a possible merger with Wachovia Corp., a person familiar with the matter said today. Goldman Sachs, which said it didn't think it needed to do any deals, sank as much as 25 percent today before the news about the potential federal agency.

Clinton's Call

Lawmakers are weighing responses to a crisis that prompted Treasury Secretary Henry Paulson to seize mortgage lenders Fannie Mae and Freddie Mac and caused Lehman's bankruptcy in the past two weeks. The Fed's takeover of AIG followed its March agreement to take on $29 billion of Bear Stearns Cos. assets to secure the company's takeover by JPMorgan Chase & Co.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, this week proposed Congress create a federal entity to buy bad loans. Senator Hillary Clinton of New York, a former candidate for the Democratic nomination for president, proposed resurrecting a 1930s-era agency to stem foreclosures.

``We need a modern day Home Owners' Loan Corporation,'' Clinton said in remarks at the Senate today. ``There will not be any semblance of a normal or orderly market'' without ``quarantining'' the devalued loans outstanding, she said.

Mack's Meeting

Morgan Stanley's Mack, 63, addressed employees this morning in a crowded meeting in New York, saying the firm's earnings and balance sheet were sound, according to people who attended or watched the firm-wide video broadcast. He said Morgan Stanley was in stronger shape than Lehman or Bear Stearns.

Morgan Stanley also blamed short sellers for pushing down the shares. Three U.S. Securities and Exchange Commission rules that took effect today aim to reduce manipulative trades betting on a drop in share prices.

Chairman Christopher Cox said in a statement late yesterday that the SEC may require hedge funds to disclose their short-sale positions and plans to subpoena the funds for their communication records.

The U.K.'s Financial Services Authority today banned short- selling of financial companies for the rest of the year and will require daily disclosure of all existing short positions in such firms when they exceed 0.25 percent.

Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: September 18, 2008 18:36 EDT