Oh, just when it might be looking safe to go into the pool again, by virtue of the EU putting up a substantial enough plan to possibly start calming overfrayed nerves, another source of worry appears to be deteriorating, namely Morgan Stanley.
Sports fans may recall that a badly-needed cash injection into the embattled investment bank by Japanese bank Mitsubishi UFJ was due to close Tuesday. However, the deal had come to look like a complete turkey from the Japanese side, since their investment of $9 billion, which at the time of announcement amounted to 21% of the company, now contrasts with a market cap of just over $10 billion.
The good news is that Mitsubishi does not appear to be attempting to reduce the size of the investment but securing better terms, namely, a deal consisting entirely of preferred stock. But if the revised deal does not close Tuesday, anxiety about Morgan Stanley could escalate, with not-pretty side effects. This is high stakes poker indeed.
From the New York Times (hat tip reader Tim):
Morgan Stanley was racing to salvage a crucial investment from a big Japanese bank on Sunday in an effort to allay growing fears about its future — negotiations so critical to the financial markets that they have drawn in both the Treasury Department and the Japanese government.
Morgan Stanley, one of the most storied names on Wall Street, was locked in talks on Sunday to renegotiate its planned $9 billion investment from the Mitsubishi UFJ Financial Group of Japan, according to people involved in the talks.
The completion of a deal might help calm markets worldwide, which sank last week because of escalating concerns about the fate of financial institutions like Morgan Stanley. Investors might read the investment as a sign of confidence in the bank’s future.
Mitsubishi was pressing for more favorable terms after Morgan Stanley lost nearly half its market value during last week’s stock market plunge.
Treasury, however, is not planning to have the United States government take a direct stake in Morgan Stanley as part of a broader effort to stabilize the financial industry and the markets, these people said. Wall Street had buzzed Friday that such a move might be unavoidable.
Morgan Stanley is in the midst of the gravest crisis in its 74-year history, even though analysts estimate that the bank has more than $100 billion in capital. Morgan Stanley’s shares price has plunged nearly 82 percent this year, closing at $9.68 on Friday.
Last month, Mitsubishi agreed buy about 21 percent of Morgan Stanley. The investment was to be made in the form of $3 billion in common stock, at $25.35 a share, as well as $6 billion in convertible preferred stock with a 10 percent dividend and a conversion price of $31.25 a share.
Under the proposed new terms being discussed on Sunday, Mitsubishi would still buy roughly 21 percent of Morgan Stanley, these people said. But all of the investment would be through preferred shares, with a 10 percent annual dividend. Many of those shares would be convertible into common stock, but the Japanese bank was trying to set a conversion price far lower than originally proposed.
Morgan Stanley and Mitsubishi have been in constant contact with government officials this weekend, these people said.
Mitsubishi and the Japanese government have sought assurances from the Treasury Department that if the United States were to decide to inject money into Morgan Stanley at a later time — a possibility some analysts do not rule out — that such a move would not wipe out preferred shareholders. The Treasurey has indicated that it might use some of the $700 billion bailout package to take direct stakes in banks, but it has not spelled out how it would do so.