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Morgan Stanley's John Mack Swings Into Action

As Morgan Stanley’s stock price spiraled downward one day after the firm announced the strongest profits on Wall Street on Tuesday, CEO John J. Mack swung into action. Mack made calls to Treasury Secretary Hank Paulson, SEC chairman Christopher Cox, New York senator Chuck Schumer, and Hillary Clinton, asking them all to take steps to stop short sellers from driving Morgan Stanley’s stock down further.

At the same time, Mack and his team began to consider the company’s other options. As The New York Times reported, Wachovia’s CEO Bob Steel put in a call to see if Mack would be interested in merging, according to a person familiar with the discussion.

If Morgan Stanley merges with Wachovia, it will be a great irony. Several years ago, Morgan Stanley’s then CEO Philip J. Purcell suggested that the firm should merge with Wachovia. That was one big reason why many of the firm’s bankers bolted. The exodus ultimately led to Purcell’s resignation, and Mack’s return to the firm.

There’s also chatter on the Street that a merger with HSBC could be a possibility. Morgan Stanley declined to comment.

Mack’s memo explaining his actions to employees is below:

September 17, 2008

To: All Employees

From: John Mack

I know all of you are watching our stock price today, and so am I. After the strong earnings and $179 billion in liquidity we announced yesterday - which virtually every equity analyst highlighted in their notes this morning - there is no rational basis for the movements in our stock or credit default spreads.

What’s happening out there? It’s very clear to me - we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down. You should know that the Management Committee and I are taking every step possible to stop this irresponsible action in the market. We have talked to Secretary Paulson and the Treasury. We have talked to Chairman Cox and the SEC. We also are communicating aggressively with our long-term shareholders, our counterparties and our clients. I would encourage all of you to communicate with your clients as well - and make sure they know about our strong performance and strong capital position.

I’ll be hosting a town hall tomorrow morning at 8:30 a.m. EDT to address any questions that you have, and would encourage all of you to participate in that discussion. Viewing details are available on Morgan Stanley Today.

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