Note: variants of the word “protect” as regards the US Treasury’s stance towards the pending $9 billion Mitsubishi UFJ investment in Morgan Stanley, appeared in the headline and first paragraph of the New York Times discussing the state of the deal. But the text of the article suggests the Treasury may be engaging in a bit of tap dancing, since the Japanese want a guarantee and the US Treasury appears loath to go that far. But the difference between a guarantee and “protection” appears to be semantic, so one has to wonder about the careful use of terminology.
From the New York Times:
In what could set an important precedent, federal officials assured a big Japanese bank late Sunday that its planned investment in the embattled Wall Street giant Morgan Stanley would be protected, according to people involved in the talks.
After two days of tense negotiations, Treasury officials urged a hesitant Mitsubishi UFJ Financial Group to proceed with its $9 billion investment in Morgan Stanley, which has sought the capital infusion to reassure investors and customers about its stability…
The Treasury’s assurances amount to another extraordinary move by the government and could serve as a model for future deals. The tense, weekend talks were so critical to the financial markets that they drew in both the Treasury and the Japanese government.
Mitsubishi and the Japanese government pressed the Treasury Department over the weekend to guarantee that if the United States were to inject money into Morgan Stanley at a later time — a step the Treasury has ruled out for now — the move would not wipe out Mitsubishi’s investment.
Investors suffered deep losses when the government effectively nationalized the nation’s largest mortgage finance companies, Fannie Mae and Freddie Mac. The Treasury has said it might use some of the $700 billion bailout package authorized by Congress to take direct stakes in banks, but it has not spelled out how it would do so. Many prospective investors, like sovereign wealth funds, have been sitting on the sidelines, reluctant to invest in financial services companies while the government’s plans remain uncertain….
Yves here. We said at the time of the Freddie and Fannie conservatorship that eliminating the preferred dividends, which led to immediate large losses on those instruments, was very short sighted and would hurt future efforts to raise bank capital from private sources, particularly since preferred stock is the best investment vehicle in a weak entity. That chicken has already come home to roost.
Mitsubishi was pressing for more favorable terms after Morgan Stanley lost nearly half its market value during the stock market plunge last week…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 night, Mitsubishi would still buy roughly 21 percent of Morgan Stanley, according to people involved in the talks. 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, probably close to $20.
Henry M. Paulson Jr., the Treasury secretary, has urged both companies to devise a private-market solution and has indicated that he does not believe that Morgan Stanley needs capital from the government. However, Treasury officials privately hinted to members of both companies that the government would back Morgan Stanley if it came to that, these people said, suggesting that he does not want to repeat the troubles that resulted from allowing Lehman Brothers to go bankrupt.
George Soros, the prominent investor, wrote in a column in The Financial Times that the United States government needed to rescue Morgan Stanley.
“The Treasury should offer to match Mitsubishi’s investment with preferred shares whose conversion price is higher than Mitsubishi’s purchase price,” Mr. Soros wrote. “This will save the Mitsubishi deal and buy time for successfully implementing the recapitalization and mortgage reform programs.”.
I absolutely can’t wait to read histories of this financial crisis in the coming years. Players named, roles explained, politics, international intrigue. Should be a real page turner.
Hope the prologue begins with a list of people sent to prison.
Obviously everybody knows MS is likely to need major help from the Feds in spite of public pronouncements. Mitsubishi is being very reasonable in demanding its intervention include that fact.
I don’t think it general the Feds could avoid hitting the pre-existing preferred with an intervention. Truthfully the GSEs were insolvent long-term and the Feds did them a favor. Of course, once the Feds intervene they eventually want to draw in private capital and that will require new deals, just as with Mitsubishi here.
Yves — Your blog has been so consistently fantastic that it is essential reading for me day and night. I check it almost every waking hour. But I still disagree with you on the the preferred stock issue. There is no value in these companies. The hole in LEH’s balance sheet was enough evidence for me (not to mention that this is a belief I have had for at least nine months now). In my opinion, the government should completely wipe out common, preferred and some of of the bondholders and then invest capital to keep the institutions alive. The government’s going to be a backstop anyway, right? There’s no other option now, right? Every single country seems to be doing it with every major financial institution. I don’t care about Mitsubishi’s money. If we wait and wipe out all the “gamblers” (OK, pejorative, but still…), then the government has a better chance to see its money back. I still agree with 99% of the content of your posts. Seriously.
There is value in these companies, the same value that has always been predominant in investment banks: the human capital. GS first, and MS second, were the preeminent investment banks in the world, filled with excellent people. The same can be said of some hedge funds that are blowing up, probably, but nevertheless these people can be a big value and Mitsubishi knows it. They are people Mitsubishi could not have dreamed of hiring before.
If Mitsu doesn’t like existing terms, they should withdraw, US government should inject capital, and the US taxpayer will benefit as those employees drive profits in the choppy markets to come. At these prices, MS is a screaming deal and, as a taxpayer, I want it.
One minor niggle: “semantics” means “meaning”. (Ask any Computer Science major; the corresponding word you are looking for is “syntactics”.) The all-too-common phrase “it’s just semantics” is not what the writers want to say. What happened to the phrase “a distinction without a difference”?
Re: "But the difference between a guarantee and "protection" appears to be semantic, so one has to wonder about the careful use of terminology."
See: Paranoid personality disorder is characterized by a distrust of others and a constant suspicion that people around you have sinister motives.
Hear: Radiohead – Paranoid Android (on Jools Holland, 1997)
As I said on my blog , it appears that there’s some kind of insane competition to repeat the exact same policy errors that led to this financial crisis, only this time on an even grander scale.
“Mitsubishi and the Japanese government pressed the Treasury Department over the weekend to guarantee that if the United States were to inject money into Morgan Stanley at a later time — a step the Treasury has ruled out for now — the move would not wipe out Mitsubishi’s investment.” — NYT
When you and I go “leveraged bottom fishing,” it’s always with the real risk of getting blown out.
But when Hank’s pals go bottom fishing, they get a free “Paulson put.”
I deplore this descent into fascism — using the word not in the common pejorative sense of “right wing” or “jackbooted” (though they apply), but rather in the functional sense of “state-directed, state-dominated economy.”
Anon 1:04 AM who “wants MS as a taxpayer” is going to find that all those “excellent” 160-IQ ambitious people will not enjoy working for the Japanese or the fedgov, and will soon drift away — leaving the taxpayers to fund the handsome salaries of the drones who stay.
The US financial sector is still grossly bloated. There were already plenty of money-center banks. Why do we need two newly-created ones called GS and MS? Toss ’em into the street and let the people rip ’em apart with crowbars and bare teeth. This is not gonna end till some iBankers get lynched.
— Juan Falcone
NOTE TO YVES: I hope you delete both this post and Juan’s, in the name of blog civility.
Yeahhhhh, go get them! Burn those bankers! It’s time the people who have no stake in this argument, i.e. the bottom half of earners who pay 5% of all taxes and use gov’t services like locusts, to RISE UP and punish the top 5% who pay 50% of all taxes, because that top 5% might be getting tax $$ approaching a fraction of the amount they have paid over the years to support just about everyone else.
How dare they? How dare they ask for help? That’s YOUR money, Juan! You contributed something, right? 5%! Thanks for keeping the engine of America running, pal, and thanks for showing your true colors.
Seriously. Who are the people showing up on this blog all of a sudden?
When you count the various “social security” taxes in the same pool of Federal income taxes to which you are most likely referring, the picture of the overall burden shifts considerably to the middle and the bottom half.
And from what I’ve seen, not much in the way of services is provided at all.
But that all misses the point. People are angry because bankers (and the government) have massively dislocated the economy, creating needless losses and turmoil.
And contrary to what you imply the middle to upper middle class is quite angry at what this has done to their asset investments.
Treasury will PROTECT conglomerate Mitsubishi’s investment.
Treasury will PROTECT Wall Street’s Morgan Stanley from default.
But I thought the Treasury was against PROTECTionism!
Oh, that must be only for protecting the interests of the average American citizen.