Morgan Stanley not rushing to repay TARP - source

NEW YORK, March 31 (Reuters) - Morgan Stanley (MS.N) Chief Executive John Mack said the bank does not plan to immediately repay a $10 billion bailout from the U.S. Treasury, according to a source who listened to an internal conference call on Monday.

Mack also said the bank's executives, money managers and bankers had discussed whether the firm should buy toxic assets from banks through the Treasury's Public Private Investment Program and resell them to brokerage clients, the source said.

"As much as we'd like to give the money back and just focus on not having government involvement, as a public company we think that it's the wrong time to do it now," Mack was quoted as saying.

The source, who was not authorized to speak publicly on the matter, said the call was with employees of Morgan Stanley's wealth management arm and Citigroup's (C.N) Smith Barney unit, which will be merged by the third quarter.

Morgan Stanley declined to comment on the call.

Morgan Stanley was among the nine largest U.S. banks that received $125 billion of investments under the Treasury's Troubled Asset Relief Program, or TARP.

Then-Treasury Secretary Henry Paulson's goal was to stabilize banks and reassure jittery markets.

Financial stocks have recovered since last fall -- Morgan Stanley shares are up 140 percent since late November -- and the outlook for financial markets has improved.

But Mack cautioned employees that 2009 would likely be "a difficult year" as banks shed hard-to-trade debt, the source said.

TARP recipients including JPMorgan Chase & Co (JPM.N), Goldman Sachs Group (GS.N) and Bank of America Corp (BAC.N) have said they are able and eager to repay TARP funds as soon as they are permitted by regulators.

The government funds, though carrying a modest 5 percent interest rate, also come with compensation caps and other restrictions that bankers would like to escape.

Shedding the TARP money is contingent on banks having sufficient capital, passing a regulatory "stress test," and getting approval from the Treasury and the Federal Reserve.

The source said Mack made the TARP comments as he reiterated his support for Morgan Stanley Smith Barney, a venture that will be the nation's largest brokerage with roughly 20,000 advisers.

Morgan Stanley's James Gorman will head up the venture.

The combination is on track to be completed by the third quarter, and possibly earlier.

With regard to the toxic assets plan, Mack said the bank is seriously considering buying assets and packaging them for sale to its individual investors, according to the source.

Under plan details announced last week, the Treasury will provide up to $100 billion to finance the purchases of loans and securities by private investors. The program could ultimately grow to $1 trillion. (Editing by John Wallace)