By Christian Plumb and Joseph A. Giannone
NEW YORK (Reuters) - Morgan Stanley
Stock of Morgan Stanley, the No. 2 independent investment bank after Goldman, fell 33 percent on doubts that a planned $9 billion cash injection from Mitsubishi UFJ Financial Group Inc (MUFG) <8306.T> would be completed as announced last week.
Both companies assured investors the deal would close on Tuesday, but there were also some questions whether the MUFG investment would be enough to let the company to ride out the current storm.
Morgan Stanley's entire market value now stands at less than $8 billion, or less than what MUFG, Japan's largest bank, insists it plans to pay for just 21 percent of the company.
"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."
WAITING GAME
Moody's warned Friday it might cut the long-term debt ratings of Morgan Stanley and Goldman, which would increase their cost of borrowing.
Morgan Stanley, whose shares have lost about 70 percent in the past week and are near their lowest in nearly 14 years, declined to comment on the movement in its stock and debt, or on speculation about the MUFG deal.
The 73-year-old firm, which became the fifth-largest U.S. bank after its recent conversion to a bank holding company, has little choice but to wait for Tuesday, when it could 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 about a $2 billion paper loss on the stock, based on current prices.
Shares in Goldman, which declined to comment on the Moody's move, were down 13 percent. The Amex Securities Broker-Dealer Index <.XBD> shed 3 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.
"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 looks increasingly wobbly to some investors as its share price plummets, but analysts said the bank would be more likely to find buyers than Lehman Brothers Holdings Inc
In the worst case scenario of no buyers emerging, the government would be unlikely to let the bank fail, a person close to the matter said.
CDS 'BLOWING OUT'
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.
Morgan Stanley stock tumbled by $4.18 to $8.27 a share on the New York Stock Exchange, while Goldman Sachs fell $13.85 to
$87.50.
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 24 percent of the sum insured, plus 5 percent a year, from 19 percent on Thursday, according to Phoenix Partners Group.
That means it would cost $2.4 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 (American International Group Inc
MACK'S BIG TEST
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.
It had a tier 1 capital ratio of 12.7 percent at the end of August and $23 of assets for every dollar of equity.
Earlier this week, Morgan Stanley Chief Executive John Mack, who is facing his biggest test since taking the helm in June 2005, warned staffers that the bank would be under siege but urged them to stay upbeat.
Mack, 63, returned after previously leaving following a power struggle and has been blamed by some analysts for raising its exposure to risk at the wrong time.
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' 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
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(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 Gerald E. McCormick)
