Morgan Stanley merger talks cool

NEW YORK, Sept. 21 (UPI) -- Once-hot merger discussions between ailing U.S. financial giant Morgan Stanley and retail banker Wachovia Corp. have slowed, sources say.

The ongoing negotiations over a massive, $700 billion bailout of the U.S. financial industry by the U.S. Treasury, and a surprise bankruptcy court devaluation of the "toxic" mortgage-backed securities held Lehman Brothers, have put the brakes on merger talks, The Financial Times reported Sunday.

The companies are waiting to see how the provisions of the Bush administration's Wall Street bailout proposals would affect the merger-and-acquisition dynamics within the financial sector, unnamed sources told the newspaper.

"The government plan gives everybody time to take a deep breath and see how the new environment can change things," the source said.

Another factor was the revelation that Lehman Brothers, the collapsed Wall Street firm, had reassessed the worth of its mortgage-backed securities holdings downward from $72 billion to $47.4 billion at a bankruptcy hearing Friday.

The Financial Times said that might prompt buyer Barclays Bank to change the terms of its Lehman Brothers deal or scrap it altogether, creating more uncertainty over the value of the complex derivatives at the heart of the credit crisis.