2ND UPDATE: MUFJ To Buy Up To 20% Stake In Morgan Stanley

Dow Jones
September 22, 2008: 10:13 AM EST

(adds further details)

DOW JONES NEWSWIRES

Morgan Stanley (MS) announced that Japan's Mitsubishi UFJ Financial Group Inc. (MTU) has agreed to buy an investment in the company that would eventually reach 20%.

The deal follows the U.S. Federal Reserve's decision late Sunday to convert Morgan Stanley and the other remaining independent broker-dealer, Goldman Sachs Group Inc. (GS), into traditional bank-holding companies. "This strategic alliance with Mitsubishi UFJ can put Morgan Stanley in an even stronger position as we look to realize the opportunities we see in the rapidly changing financial marketplace," Morgan Stanley Chief Executive John Mack said in a statement.

"As one of the largest commercial banks in the world, Mitsubishi UFJ would be a valuable partner as we transition to a bank-holding company and build our bank services and deposit base," Mack added.

The move for the remaining independent brokerages to transition out of the Wall Street model marks a sharp turnaround from last week, when Goldman Sachs and Morgan Stanley repeatedly vowed that they would stick with the their model despite a growing pool of doubters following the bankruptcy protection filing last Monday of Lehman Brothers Holdings Inc. (LEHMQ) and the planned acquisition of Merrill Lynch & Co. (MER) by Bank of America Corp. (BAC).

Shares of all the firms plunged last week amid record volumes and especially volatile trading as the moves by Lehman and Merrill roiled the financial markets and led to the onset of a crisis on Wall Street. Over the course of the week, Goldman and Morgan Stanley hit lows of $85.88 and $11.70, respectively, before paring some of their losses Friday on hopes of government efforts to end the week down 16% and 27%, respectively.

Shares of Morgan Stanley jumped nearly 11% in early trading to $30.06, while Goldman slipped 0.4% to $129.33.

Investors in credit default also seem relieved about the end of independent investment-banking firms and the Morgan Stanley news, as the credit-protection costs on Morgan Stanley fell to between $390,000 and $420,000 to protect $10 million worth of bonds for five years, from $560,000 Friday. Goldman's debt- protection costs slid to between $280,000 and 350,000 from $485,000 Friday. The big gap between bid and offer points to sluggish trade, though, which could help account for such large moves amid so much uncertainty.

The Fed's decision to convert Morgan Stanley and Goldman into traditional bank-holding companies represents an extraordinary attempt to prevent the crisis on Wall Street from infecting the two premier institutions. As a bank-holding company, Goldman Sachs would become the fourth-largest such company in the U.S., behind Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C).

With the move, Wall Street, as it has been known for decades - a coterie of independent brokerage firms that buy and sell securities, advise clients and are less regulated than old-fashioned banks - will cease to exist. Wall Street's two most prestigious institutions will come under the close supervision of national bank regulators, subjecting them to new capital requirements, additional oversight, and far less profitability than they have historically enjoyed.

The Fed said it would also extend additional lending to the broker-dealer arms of the two firms, as well as to that of Merrill Lynch, as they make the transition. The steps formalize a quid-pro-quo that regulators have warned about in the months after Bear Stearns's near collapse in March - that in return for access to the Fed's emergency lending facilities, the firms would need to subject themselves to more oversight.

The rapid pace of change in recent weeks highlights the severity of the financial crisis, and suggests it is deeper than many on Wall Street were willing to admit. Some investors may view the move as a negative signal, for it suggests that Goldman and Morgan Stanley, two institutions that were once considered rock solid, may have been facing greater liquidity issues than was apparent.

Goldman - and to a lesser extent, Morgan Stanley - has maneuvered through the credit crunch better than other investment banks. But its business model, which relies on short-term funding, is under attack.

-By Donna Kardos, Dow Jones Newswires; 201-938-5963; donna.kardos@dowjones.com

(Jon Hilsenrath, Damian Paletta and Aaron Lucchetti of The Wall Street Journal contributed to this report.)

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