October 13, 2008 – 10:14 am

Morgan Stanley reported abysmal earnings, but said it had confidence in its model. Then the bank changed that model from investment to deposit banking. So with hat in hand, Morgan Stanley made the rounds and exchanged a 21 percent stake in itself with Mitsubishi UFJ Financial Group for a $9B cash fix.

Morgan Stanley agreed to sell a 21% stake to Japan’s Mitsubishi UFJ Financial Group Inc. for $US9 billion ($11 billion), seeking to shore up investor confidence after borrowing costs climbed and its stock fell by half.

Mitsubishi UFJ, Japan’s biggest lender, will buy $US3 billion of common stock and $US6 billion of convertible preferred stock that pays a 10% dividend, the two companies said today in a statement.

Since the ban on short selling expired, the hedgies have sunk their fangs in and bitten deep into Morgan. So far they’ve run off with 26 percent of the company, allowing Morgan a fair share in the chaos pushing down the Dow.

The latest slide came on another brutal day for stocks, particularly financial shares. But it was the travails of Morgan Stanley that seemed to rivet much of Wall Street.

Once again, questions swirled about the fate of Morgan Stanley, despite the bank’s efforts to quiet them. Short-sellers, those investors who wager against stocks, took renewed aim at the firm. At midnight on Wednesday, regulators lifted a temporary ban on short sales. Mr. Mack had angered many hedge funds by lobbying for the restriction.

Mr. Mack angered hedge funds and ruined investors. That’s why the bank is now looking to raise $9B from Mitsubishi UFJ of Japan. With the shares of Morgan at their lowest in a decade, it seems reasonable to suggest that Mitsubishi UFJ might think about reconsidering.

Fears that the deal would not close were evident in the bond market, where Morgan Stanley’s 10-year debt sank to 64 cents on the dollar on Thursday, down from 96 cents a month ago. The price of insuring Morgan Stanley’s debt soared to record heights, and Moody’s Investors Service said it put Morgan Stanley’s A1 credit rating on a review for a possible downgrade.

Those fears are driven by credit default swaps and the new admission that Morgan was less capitalized than previously thought.

A few days ago, Morgan Stanley was apparently well-capitalized. Then rating agency Egan-Jones said the firm needed $30 billion of new equity. Then Moody’s threatened a downgrade. Then the $10 billion Mitsubishi deal seemed ready to fall apart. Now Egan-Jones says Morgan Stanley needs $60 billion.

That’s $60B; and that changes everything.

Although there are rumors at Morgan Stanley about a term sheet “floating around” describing the terms under which the Treasury would take over Morgan Stanley, this is probably more reflective of panic at the firm than any actual knowledge of the government’s plans.

Well actually, we all have actual knowledge of the government’s plans. The bailout told us all we need to know. And while were at it, let’s mention this,

Morgan Stanley and Goldman Sachs, the last remaining independent investment banks, may receive cash injections from the American government as part of Treasury Secretary Henry Paulson’s plan to buy stakes in financial institutions.

That isn’t how you spell independent, and even that stingy Mitsubishi UFJ Group needed convincing. Witness:

The original terms said that Mitsubishi would purchase $3 billion in common stock and $6 billion in convertible preferred stock. In the new deal, all of the investment is in preferred stock. Though the total investment remains the same, the Japanese bank is paying lower prices per share — $25.25 instead of $31.25. Morgan Stanley will pay Mitsubishi a 10 percent dividend on the entire investment instead of paying a dividend on only part of the investment, as previously planned.

Imagine that!


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