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 When Mitsubishi UFJ Financial Group Inc. agreed to invest $9 billion in
Morgan Stanley, it was viewed as a capital infusion in exchange for a
21% stake in the U.S. bank. In the two weeks since, Morgan's stock has
cratered, and based on Thursday's close of $12.45 a share, Mitsubishi UFJ's
investment would buy 65% of the bank. Now, with shares hovering in the
$8 range in Friday trading, it looks like $9 billion would buy Morgan
Stanley outright (the last time the firm was worth $9 billion was in
1997 before it merged with Dean Witter). So what will happen between
now and Tuesday's expected deal close?
With no breakup fee, Mitsubishi UFJ is bound by its contract with Morgan
Stanley and would face potentially "unlimited liabilities" if it were
to walk away, notes The Wall Street Journal. However, buried inside the deal agreement
is a material adverse effect clause that would allow the Japanese bank
to cancel the deal -- even if both parties publicly claim they are
still committed to it. Mitsubishi apparently agreed to buy a set amount
of Morgan Stanley shares at a price set when the deal was signed. One
has to believe that the Japanese bank isn't prepared to take on the
massive paper losses on the deal, and might exercise its MAC. Given all that, Mitsubishi UFJ chief Ryosuke Tamakoshi, who reportedly is meeting with Morgan's John Mack in London Friday, would probably want to at least renegotiate the deal -- maybe with a slug of preferred shares thrown in. A further complication: What will the U.S. government do? Treasury and Federal Reserve officials might well be silent -- or perhaps not so silent -- participants in any Morgan Stanley-Mitsubishi talks. Now questions are surfacing about whether the MUFG's investment would even stave off insolvency. Portfolio's Felix Salmon wrote, "After all, even $85 billion wasn't enough for AIG, and MUFG is putting much less than that into Morgan Stanley, which has a similarly-sized balance sheet to AIG." Salmon believes Morgan Stanley will be the first bank nationalized under the $700 billion bailout bill. Salmon is not alone, so too does John Carney of ClusterStock. Both bloggers discount claims that Morgan Stanley is well capitalized to weather the storm -- after all, Lehman Brothers Holdings Inc.'s Dick Fuld insisted his firm was well-capitalized and ended up in bankruptcy. Additionally, these assertions -- whether true or not -- have not stemmed a minirun on the bank as hedge funds reportedly pulled a third of their money out, the Journal reports. Granted the Journal did get the liabilities issue wrong, so no one knows how valid this claim is. All this begs the question: Should we expect Henry Paulson to divulge the nationalization of Morgan Stanley at his upcoming 6:45 p.m. press conference? - Matthew Wurtzel Matthew Wurtzel is the editor of Dealscape.CategoriesComments
From: Daniel,
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.
Posted on:
October 13, 2008 4:58 AM
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The story was interesting until you started quoting bloggers who don't have the facts or are twisting the facts.