Morgan Stanley, Wachovia Talk Merger: Report

Updated from Wednesday, Sept. 17

Morgan Stanley (MS Quote) is reportedly considering a merger with Wachovia (WB Quote) or another bank, a tie-up that, if it occurred, would be the latest chapter in what is already one of the most transformational weeks ever on Wall Street.

The New York Times reported on the possible Morgan and Wachovia pact, citing people who had knowledge of the talks.

According to the report, Morgan CEO John Mack got a call from Wachovia executives Wednesday. At this point, the report said, the discussions are at a preliminary stage. Morgan Stanley and Wachovia had no comment.

Meanwhile, CNBC reports Morgan is negotiating with the Chinese government for a fresh infusion of funds. The plan is to sell a piece of Morgan Stanley to a Chinese bank. Mack dealt with Chinese government officials Wednesday to line up money from China, CNBC reports, as well as lobbied top officials from the Federal Reserve and the Treasury for their approval for a Chinese bank to increase its stake in the company.

China's sovereign wealth fund, China Investment Corporation, owns 9.9% of Morgan.

Shares of both Wachovia and Morgan, which sank to a 52-week low in regular trading, were rising in the extended hours.

Already this week, Lehman Brothers (LEH Quote) has filed for bankruptcy, Merrill Lynch (MER Quote) has agreed to be acquired by Bank of America (BAC Quote) and AIG (AIG Quote) reached an arrangement for a Federal Reserve-led bailout.

With Lehman's Chapter 11 and Merrill's takeover, that left Goldman Sachs (GS Quote) and Morgan Stanley as the lone big U.S. investment banks. However, should Morgan join forces with Wachovia or another firm, Goldman will be the last of the large independent domestic investment banks.

On Tuesday, after both reported their quarterly results, Morgan and Goldman executives said they didn't need or plan to look for merger partners right now.

Meanwhile, Washington Mutual (WM Quote) is reportedly on the auction block. A separate Times report said the lender has hired Goldman to find bidders, which could include Wells Fargo (WFC Quote), JPMorgan Chase (JPM Quote) and HSBC (HBC Quote).