Morgan Stanley, Goldman shares tumble

NEW YORK (Reuters) - Morgan Stanley and Goldman Sachs shares slumped on Friday after Moody's Investors Service said it might cut their ratings, reviving concerns about the viability of their banking models.

Stock of Morgan Stanley, the No. 2 independent investment bank after Goldman, fell 43 percent on doubts that a planned $9 billion cash injection from Mitsubishi UFJ Financial Group Inc (MUFG) <8306.T> would be enough to enable the company to ride out the current crisis.

Morgan Stanley shares have lost about 70 percent in the past week and are at their lowest in nearly 14 years on worries that Mitsubishi UFJ may back out of the cash-injection deal. Both companies have given assurances that it would close on Tuesday.

Goldman Sachs Group Inc shares were down 20 percent on worries about Morgan and the broader financial turmoil. The Amex Securities Broker-Dealer Index shed 10 percent.

"Morgan Stanley shares have been under extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet, and long-term earnings prospects are sound," David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller, said in a research note.

BANK HOLIDAY

"However, as we've seen with Bear Stearns and Lehman, once the fear virus has infected the story, it is tough to shake."

Morgan Stanley declined to comment on the movement in its stock and debt, or on speculation about the MUFG deal.

The company, which became the fifth-largest U.S. bank after conversion to a commercial bank, has little choice but to wait for Tuesday, when it can complete its $9 billion sale of stock and convertible preferred shares to Mitsubishi. The deal could be completed before U.S. markets open on Tuesday.

People inside the bank say there was no effort under way to accelerate the waiting period for the Mitsubishi deal.

MUFG has affirmed it expects to close the deal on Tuesday at the same terms, even though it would immediately absorb a $2 billion paper loss on the stock, based on current prices.

Morgan Stanley said it does not plan to issue new common stock in a public offering, as Goldman did after billionaire investor Warren Buffett bought into the firm. It also is not likely to pursue other capital deals because they would dilute MUFG's holding and possibly scuttle that deal.

Moody's warned Friday it might cut the long-term debt ratings of Morgan Stanley and Goldman, which would increase their cost of borrowing.

"The Mitsubishi transaction hasn't closed yet ... I think there's a legitimate concern that that deal doesn't go through," said Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis. "Once (the Moody's announcement) hit last night, people jumped to the Lehman Brothers parallel."

"ON THE ROPES?"

Morgan Stanley stock tumbled $5.29 to $7.16 on the New York Stock Exchange, while Goldman Sachs was down $18.36 at $83.00.

The cost to insure Morgan Stanley's debt against default rose on Friday, indicating investor concern about its financial stability. The bank's five-year credit default swaps rose to an upfront payment of 28 percent of the sum insured plus 500 basis points a year from 19 percent on Thursday, according to Phoenix Partners Group.

That means it would cost $2.8 million to insure $10 million of debt plus $500,000 a year.

"The ratings might be cut and if you look at the credit default swaps are kind of blowing out, so I would imagine investors think that there could be some credit event in the horizon," said Ken Crawford, senior portfolio manager of Argent Capital Management in St Louis.

"Perhaps (the concerns are) that they need capital and their inability to secure that capital," he added. "We've seen the story before with Lehman and AIG. Maybe Morgan Stanley is the next company to be on the ropes or in deep, deep trouble."

Moody's said its review was "based upon its expectation that an extended downturn in global capital market activity will reduce Morgan Stanley's revenue and profit potential in 2009, and perhaps beyond this period."

Still, Moody's noted that Morgan Stanley had moved quickly to reduce risk on its balance sheet and decrease leverage, and said the firm has a "good liquidity profile."

According to a Morgan Stanley filing with the U.S. Securities and Exchange Commission on Thursday, the company had $175 billion of average liquidity at the end of August, of which $81 billion was at the holding company level.

"CONFIDENCE" KEY VARIABLE

It had a tier 1 capital ratio of 12.7 percent at end of August and $23 of assets for every dollar of equity.

Earlier this week, Morgan Stanley Chief Executive John Mack warned staff that the bank would be under siege but urged them to stay upbeat.

Veteran Ladenburg Thalmann bank analyst Richard Bove cited the MUFG comments, along with disclosures in Morgan Stanley's latest quarterly regulatory filing that it had minimal exposure to Lehman Brothers Holdings Inc's counterparty risk, as positive developments.

Still, he wrote in a research note: "Confidence is still the key variable in this story as it was in Bear Stearns and Lehman."

Shares of Mitsubishi UFJ fell 8.5 percent to 710 yen, in line with a 9 percent drop in Tokyo's index of bank stocks.

(Additional reporting by Sachi Izumi, Jennifer Ablan, Tony Munroe, Dan Wilchins, Juan Lagorio and Elinor Comlay and Kristina Cooke, and David Dolan in Tokyo; editing by Steve Orlofsky and Jeffrey Benkoe)