Morgan Stanley Plunge Looks Eerily Familiar

Updated from Friday, Oct. 10

Morgan Stanley (MS) made it through the weekend in an eerily familiar state for a player in the battered financial sector, its stock under assault due to a crisis of confidence showing no signs of abating.

With its stock closing down more than 22% Friday afternoon to below $10 a share, Morgan Stanley's situation brings to mind the collapse of Bear Stearns earlier this year and the events leading up to Lehman Brothers' bankruptcy filing last month. And while Morgan Stanley has capital and other tools at its disposal that its two former rivals did not, in its current state of panic, the market has little patience for such subtleties.

"[O]ne must hold one's breath at the moment and hope this is a different movie," Ladenburg Thalmann analyst Richard Bove wrote in a research note Friday.

The credit crisis has exposed the extreme vulnerability of former investment banks to the whims of the market. These companies depend upon a network of lenders and trading partners who have the ability to pull the plug on them as soon as they fear that their money is at risk.

That is what happened to Bear, which forced the firm to sell itself to JPMorgan Chase (JPM) at a punishingly low price in a deal brokered by the government. It also led Lehman Brothers to file for bankruptcy last month, the same weekend Merrill Lynch (MER) struck a deal to sell itself to Bank of America (symbol).

According to a report in The Wall Street Journal, the undoing of Lehman came when JPMorgan demanded $5 billion in additional collateral.