Morgan's Mack fights the attacks

It feels like an earthquake on Wall Street, and Morgan Stanley's (MS) CEO is trying to stay standing. On Monday a week ago, Mack told me, "I'm not thinking about selling the firm. I'm thinking about investing in the firm in a big way." Morgan shares have fallen 58% since, and they're down 18% just today.

Wachovia (WB) CEO Bob Steel phoned Mack yesterday to talk about a possible merger, according to sources at Morgan Stanley. Speaking to employees this morning at the firm's headquarters in midtown Manhattan, Mack said that he is considering a Wachovia deal, though it may require an "innovative" structure. He told employees that he's also talking with other potential partners, including China Investment Corp., China's sovereign wealth fund, which bought 9.9% of Morgan last December. Mack also spoke with Citigroup (C) CEO Vikram Pandit this week, he said, but since there were people at both companies who were "cynical" about a combination, they mutually agreed to end their discussion.

Wachovia looks like Morgan's most likely partner. Mack and Wachovia CEO Bob Steel, both Duke University grads, know and like each other from serving on the Duke Board of Trustees together. Wachovia wouldn't be a very healthy partner, however. Bad mortgage loans, largely from its acquisition of Golden West Financial two years ago, have sunk its stock 76% in the past 12 months. (Bank of America (BAC) is down 41%, and  J.P. Morgan Chase (JPM) is flat, in comparison.) But as major players have rushed to get together (BofA is buying Merrill Lynch; J.P. Morgan scooped up Bear Stearns), the remaining dance parners aren't real pretty.

This week, Mack, according to close sources, has been fuming about the fix that he and Morgan Stanley are in, particularly since the firm announced better-than-expected earnings on Tuesday. Mack blames short-sellers for spreading lies and driving down the stock prices of the investment banks. He's shared his anger with Treasury Secretary Hank Paulson, SEC Chairman Chris Cox, and Goldman Sachs (GS) CEO Lloyd Blankfein. Mack and Blankfein, in fact, have talked a half a dozen times in the past few days.

Meanwhile, Goldman shares have slid 43% in the past year. If the crisis continues, even Goldman, Wall Street's model firm, could be forced into some kind of merger. It's stunning to think that six months ago, there were five independent U.S. investment banks: Morgan, Goldman, Merrill, Bear, and Lehman Brothers, which filed for bankruptcy on Monday. Now there are two independent firms.

When will it end? "I wish I knew," Mack told employees this morning. As for whether Morgan Stanley can remain independent, he said, "Listen, at the end of the day, we're going to do what's in the best interest of shareholders."