From One Hand to the Other

It’s probably no coincidence that two weeks after dumping $11 billion into an insolvent American company called Merrill Lynch, Mitsubishi Financial Group is going to raise $11 billion of capital.

Mitsubishi UFJ Financial Group Inc. said Monday it will raise up to 990 billion yen ($10.6 billion) by issuing new shares over the next year, shoring up its balance sheet in the wake of a massive investment in Morgan Stanley.

It looks like a run-of-the-mill out-one-hand-into-the-other scheme perpetrated as the bank attempts to shore up its capital position.

With strategic investments domestically and abroad, as well as reinforcing the overall strength of the group through reorganization, we have put the pieces in place for future growth,” Mitsubishi UFJ said in a statement.

Ratings agency Standard & Poor’s said Mitsubishi UFJ’s share issue won’t result in a higher credit rating as the capital increase only serves to offset the capital decrease involved in buying the Morgan Stanley stake. Mitsubishi UFJ used cash to finance the investment in Morgan Stanley.

S&P also warned that the recent slowdown of Japan’s economy and falling stock prices are increasing pressure on Mitsubishi UFJ’s asset quality.

“Furthermore, the company’s profitability is also being pressured by reduced demand among borrowers and a decrease in fee income, mainly from sales of investment trusts,” it said in a statement.

Well, that’s quite a mouthful for S&P since they are usually the ones saying nothing until all life support has been removed. But what S&P did not say is that before it’s all over Morgan Stanley will dig into their balance sheet for a lot more than $11 billion.

Many Japanese banks had solid finances compared with overseas rivals as the current financial crisis unfolded, and moved to take advantage with cheap purchases abroad. But the spending spree is now forcing such banks to recapitalize, particularly as the fallout from Wall Street’s meltdown begins to pressure them in their home market.

It’s not surprising that pressure is coming from investors in the home market, but there is no advantage purchasing an insolvent bank at the onset of the mother of all credit meltdowns, regardless of how cheap the bank is bought.  So, one wonders where the pressure to buy Morgan Stanley came from in the first place.

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