Morgan Stanley hangs on Mitsubishi's $9bn pledge
Sunday, 12 October 2008
The American bank Morgan Stanley faces a critical weekend as it awaits a crucial $9bn investment from Japan's Mitsubishi bank to fend off a crisis of confidence among investors which is threatening its survival, reports The Guardian.
The 73-year-old firm has been battling persistent rumours about its financial condition in a market smarting from the collapse of rival Wall Street banks Lehman Brothers and Bear Stearns.
Shareholders dumped stock in their droves yesterday after becoming alarmed by a warning that ratings agency Moody's is considering downgrading Morgan Stanley's creditworthiness. The bank's shares plunged by 22% in New York, taking their total week-long fall to 60%.
In a deal agreed last month, Mitsubishi pledged to pay $9bn (£5.2bn) for a 21% stake in Morgan Stanley, bolstering the firm's balance sheet. The transaction is due to close on Tuesday but the recent plunge in Morgan Stanley's shares has taken the market capitalisation of the bank down to $10.7bn.
Morgan Stanley and Mitsubishi insisted yesterday that the capital injection was going ahead. But there is concern that the Japanese bank may seek to renegotiate terms, possibly by demanding a bigger slice of Morgan Stanley given the potentially perilous impact on confidence in the US bank if it walks away.
Morgan Stanley insiders have blamed short-sellers for aggravating the rout in its shares. One source said "bank" had simply become a "four-letter word" to the markets, irrespective of the underlying logic.
But to Morgan Stanley's fury, the ratings agency Moody's provided fuel for doubters by warning that it may downgrade the bank's credit score - a move which would make it harder to raise funds.
Moody's cited an expectation that "an expected downturn in global capital market activity will reduce Morgan Stanley's revenue and profit potential in 2009, and perhaps beyond this period".
Morgan Stanley employs 48,000 people at 600 offices in 35 countries. It received a qualified vote of confidence from analyst Richard Bove of Ladenburg Thalmann, who cut profit estimates but said Morgan Stanley remained highly viable.
"This firm, if left to run its businesses, is likely to produce continuous profits, even though at much reduced rates," said Bove.
Goldman Sachs also saw its stock drop by 12% yesterday. Anxiety levels in the markets were ratcheted up after credit derivatives linked to the failed US investment bank Lehman Brothers, with a face value estimated at $200bn (£118bn) to $440bn, began to be unwound.
Many banks are involved in the credit derivatives market and are exposed to the Lehman default. They include RBS and Barclays, which could be forced to make further writedowns if they fail to recover all their money.
Financial firms sold credit default swaps - a form of insurance against a company defaulting on its debt - to investors in Lehman's bonds and those betting on the bank's creditworthiness. These companies will now be forced to pay out 91.4 cents in the dollar. The figure is more than market expectations for losses on underlying Lehman bonds.
Banks around the world are hoarding cash partly in preparation for the settlement of these credit derivatives linked to a wave of big corporate defaults and lower than expected recovery levels.