Investors say Morgan Stanley not another Lehman

By Dan Wilchins

NEW YORK (Reuters) - For U.S. authorities watching from the sidelines as Morgan Stanley struggles with doubts about its survival, letting the investment bank fail is not really an option.

While near panic about the No. 2 independent investment bank's future wracked stock and bond markets this week, a person familiar with the matter said the government is unlikely to allow Morgan Stanley to fail and would instead engineer some sort of sale or bailout.

The bank's share price has fallen some 70 percent over the last week and potential ratings cuts are looming, spurring many to make comparisons to Lehman Brothers Holdings Inc's final days.

But shockwaves have been felt throughout the financial system since Lehman filed for bankruptcy on September 15 after regulators refused to help other banks buy it, an experiment U.S. authorities cannot afford to repeat.

A person close to Morgan Stanley said: "The government is persuaded that this is where they have to draw the line."

Analysts view this assessment as sensible.

"You can't possibly allow Morgan Stanley to go. The unrelenting pessimism and absence of confidence that we've seen for the last two weeks would get worse," said Michael Holland, who oversees more than $4 billion (2.34 billion pounds) of assets at Holland & Co LLC in New York.

But some analysts say Morgan Stanley does not need any sort of bailing out at the moment. On Tuesday, it is expected to close on the sale of a 21 percent stake to Japan's Mitsubishi UFJ Financial Group Inc for $9 billion.