Talks of a possible merger or partial acquisition of Morgan Stanley remain in the air even though shares in the US brokerage giant staged a rally at the close of New York markets yesterday.

Morgan Stanley is believed to have considered a merger with Charlotte, North Carolina–based Wachovia bank, in an effort to shore up capital amid a plunging share price.

Another option for Morgan believed to be discussed by chief executive John Mack was the sale of a larger equity stake to China Investment Corp – a $200 billion sovereign wealth fund set up a year ago acquired a 9.9 per cent stake in the Wall Street firm for a reported $5 billion in December.

The tie up with the Chinese firm would be disastrous for Morgan Stanley’s wealth management business, said Robert Ellis, head of Celent’s wealth management research and advisory business.

“I think such a deal would drive off a lot of the strong retail clients at Morgan. I could just see myself as a retail broker at competitor rubbing my hands together waiting to pick off MS clients if that occurred,” Mr Ellis told WealthBriefing.

Mr Ellis said a merger with Wachovia would be a much stronger wealth management play for Morgan Stanley that currently employs around 8,000 financial advisers.

“It would be a strong match up to create a bigger brokerage operation,” he said.

A Morgan spokesperson contacted by WealthBriefing declined to comment.

Morgan Stanley executives have told its financial advisors to calm clients' concerns during a conference call yesterday, according to press reports.

Morgan Stanley shares closed 80 cents higher at $22.55 at the market close following news US Treasury may create a new structure to acquire problem mortgages and real estate assets from ailing banks.

US public pension funds too were believed to have a hand in curving the trajectory of Morgan’s plummeting share price by deciding to stop lending shares to short sellers profiting from the falling share prices.

A memo obtained by WealthBriefing sent by Christopher Ailman, chief investment officer of California State Teachers’ Retirement System, said the pension fund would restrict the securities lending of their shares in Goldman Sachs and Morgan Stanley.

“I'm asking all CIOs to restrict the securities lending of their shares in Goldman Sachs and Morgan Stanley, right away, effective immediately… I realise it isn't going to stop the short sellers, but let's make it tougher,” the memo stated.