Sept. 24 (Bloomberg) -- Morgan Stanley and Wachovia Corp. shares declined and the cost to protect their debt from default soared amid concern that the financial companies need to raise capital as the turmoil in credit markets escalates.

Morgan Stanley dropped 11 percent today in New York trading, and Wachovia fell 6.4 percent as money-market rates reached the highest since January and U.S. Treasury Secretary Henry Paulson faced resistance in Congress to his $700 billion bank rescue plan. Concern also emerged that banks will have a tougher time raising cash following Goldman Sachs Group Inc.'s $10 billion stock sale and infusion from billionaire investor Warren Buffett.

The Goldman sale ``just sets the bar at a new price'' for banks that want to raise capital, said Ralph Cole, a vice president for research at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which oversees $2.7 billion including Goldman shares. There's ``fear that others will have to go out and raise equity, and I guess one source is gone.''

Credit-default swaps tied to the debt of Morgan Stanley jumped 290 basis points to 790 basis points, according to broker Phoenix Partners Group. Wachovia climbed 93 basis points to 698 basis points, CMA Datavision prices show. Bondholders and trading partners use the derivatives to protect against losses on the debt. The price rises as perceptions of creditworthiness decline.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Mitsubishi UFJ Deal

Morgan Stanley, the second-largest independent securities firm, said Sept. 21 it entered into a ``letter of intent'' to sell as much as 20 percent of the company to Tokyo-based Mitsubishi UFJ Financial Group Inc. Japan's largest lender agreed to a preliminary price of $8.4 billion pending due diligence.

Morgan Stanley fell $3.21 to $24.79 in New York Stock Exchange composite trading. Wachovia dropped 95 cents to $13.80.

``Prior to this Goldman was assumed to have a relatively stronger balance sheet,'' said Ken Crawford, a senior portfolio manager at Argent Capital Management LLC in St. Louis, which manages $850 million. Now the view on other banks is ``perhaps they would need more money than they've allegedly already raised.''

Paulson and Federal Reserve Chairman Ben S. Bernanke spent a second day seeking Congressional approval to buy troubled assets from financial companies. Republicans in the House of Representatives told Paulson that the legislation wouldn't pass as proposed and asked for more time to consider alternatives.

Bank Lending Rates

As Congress debated, credit markets continued to deteriorate. The one-month London interbank offered rate that banks charge each other for loans in dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today.

In a sign of banks' reluctance to lend, the rates charged for short-term loans relative to Treasury bill rates, known as the TED spread, rose to 3.02 percent, higher than the 3 percent level reached during the stock-market crash of 1987.

A benchmark gauge of corporate credit risk also jumped today. The Markit CDX North America Investment Grade Index, a credit-default swap index tied to the bonds of 125 companies in the U.S. and Canada, rose 9.5 basis points to 169.5 basis points, Phoenix prices show.

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

Last Updated: September 24, 2008 18:15 EDT