As of early Friday afternoon, Mitsubishi UFJ Financial Group’s long-awaited investment in Morgan Stanley could more than give the Japanese bank a big stake in the embattled firm. Technically, it could buy Morgan Stanley outright.
Given the steep slide in Morgan Stanley’s stock, the firm’s market value is now worth about $8.4 billion, having come up from even further lows. Mitsubishi’s investment — the apparent subject of numerous rumors around trading floors — is for $9 billion, for 21 percent of the American investment bank.
Shares in Morgan Stanley traded at about $7.40 by early afternoon Friday.
It’s worth noting that Mitsubishi would open itself up to potential new hazards were it to try and acquire more than 21 percent of Morgan Stanley. As The Wall Street Journal pointed out on Friday, under federal regulations, owning 25 percent or more of a bank constitutes control, imposing several financial constraints on Mitsubishi.
And by owning Morgan Stanley outright, Mitsubishi would leave another recent acquisition, UnionBanCal of California, exposed to the investment bank’s liabilities. (And therefore, the Federal Deposit Insurance Corporation as well.)
(Thanks to Dealbreaker for the pointer.)
2008
1:36 pm
If there was ever a case for a share buyback this would be the one. MS should borrow the $9bn for a week or so to buyback all its shares and take the firm private. Then it wouldn’t be subject to the intense pressure by the shorts.
— Posted by hammer
2008
1:44 pm
As a followup. Partner with MUFJ and a few private equity firms or SWF and take the firm private. Set the price at $20/share ($20bn) to squeeze out the shorts. At the same time sell off all excessive financial assets. Raise short-term funding from overseas banks and thru perpetual preferred shares. Utilize the Fed with all of its powers to provide liquidity.
— Posted by hammer
2008
2:13 pm
“When the tides of life turn against you, and the current upsets your boat. Don’t waste those tears on what might have been, just lay on your back and float.”
Ed Norton
The Honeymooners
— Posted by williambanzai7
2008
2:16 pm
Post #1 actually has an excellent point.
— Posted by Michael Williams
2008
2:30 pm
re posts 1 and 3. how exactly would buying the stock alter its balance sheet? and buying the stock with debt? id like some of what youre smoking.
— Posted by blackhorn
2008
2:34 pm
Hammer:
Great idea…and who exactly is going to loan them 9 billion dollars–hoo ha!
— Posted by larry$
2008
2:58 pm
#1has a point except that the credit markets are frozen, legitimate businesses cannot borrow short term-bankks fear throwing good money after good. Why would anyone throw good money after bad, investing in what might be the rust belt of the financial system?
— Posted by marc salomonm
2008
3:00 pm
Would _you_ loan them the money? That’s the big problem with #1’s plan. Otherwise, a great idea.
— Posted by DavidG
2008
3:06 pm
“It’s worth noting that Mitsubishi would open itself up to potential new hazards were it to try and acquire more than 21 percent of Morgan Stanley.”
You mean “try to acquire”
— Posted by AK
2008
3:23 pm
I agree with #4, plus short selling has been banned, remember?
— Posted by Henry H
2008
3:28 pm
Mitsubishi is already a financial holding company under the Bank Holding Company Act. I am not sure exactly what additional restraints would be put on the company. They should get 50% of the company for their $9 Billion if they are committed to the deal.
— Posted by Eric O.
2008
3:45 pm
After this is all over, it’s very possible Goldman Sachs will be the only investment bank left - how convenient for them. The CEO Lloyd Blankfein meets with Paulson to discuss “economic policy” and bailing out AIG, on May 2nd Paulson and Kashkari met with CEOs from investment banks to discuss “economic policy” except nobody knows what they talked about because it was a private meeting, now Kashkari is in charge of the $700 billion bailout, Robert Rubin, another former GS employee who helped give them a government bailout when he was in the Treasury department is “advising” Obama and nobody knows if Paulson still has GS stocks.
When GS decides they don’t want to be a bank holding company anymore which I’m sure they will in a few years, they won’t have any competition.
But can’t let another bank fail after what happened to LB so they should ask Paulson to loan them the money because we have too many banks relying on foreign investors.
— Posted by Jennifer
2008
3:47 pm
This discussion illustrates the fallacy of too much reliance on mark-to-market accounting. There is no way on earth Mitsu could take $9B and BUY Morgan. If anyone tried this in the open market, the Morgan share price would be quickly bid up to a more rational value, making the acquisition impossible without raising far more money. The only way to make the deal would be with the Morgan board agreeing (quite stupidly, I might add) to sell the bank for the current market value. Wake up, guys. This is a perfect example of why mark-to-market is a pile of misbegotten crap from the accounting and regulatory community when applied to the valuation of any large part of an investment package. If you’re selling or buying 100 shares, of course it’s mark-to-market. But if you’re buying more than 5-10% of a huge enterprise, it’s silly beyond belief. Financial panics are partly caused by lack of good information, but they are largely driven by the unbelievable cupidity, ignorance, and stupidity of the people who have risked their capital in the markets.
— Posted by ldmjr
2008
3:48 pm
I think if it is “too big to fall”, the govenment would loan MS the money using the famous 700b bailout money and #1 is a good point.
— Posted by Eric W
2008
3:53 pm
#6 is wrong. The short selling ban has been lifted and that is why MS is in this mess. We have the Fed and Treasury doing all they can to support the banks and relieve the pressure, but we have a career lawyer-politician at the SEC who just doesn’t get it. McCain got it right: Cox is a dope and needs to be fired.
— Posted by JW
2008
3:55 pm
Is this the same hammer that works for Morgan in Fixed Income Settlements
— Posted by Jenico
2008
3:59 pm
The short selling ban was lifted Wednesday night. MS has more than enough cash on hand to buy all of its shares at the current price, so not really clear on why they do not. They were a partnership once upon a time.
— Posted by LP
2008
4:04 pm
#6 - The short selling ban was lifted as of 12am yesterday - a possible cause for the massive drop.
— Posted by Chrystyna
2008
4:14 pm
It seems that a number of commentors may be directly involved in this issue. As a small time tax accountant, my interest is academic-I OWN NO SHARES IN US FINANCIAL INSTITUIONS.
At one point I also did what is now called Forensic Accounting. Unfortunately many times I was called on to investigate a corporate purchase and would find that much of the Receivables were contested or simply fantasy.
Payables would also frequently be understated. It’s time for corporate whiners to face the music. Shareholders are NOT as stupid as Wall Streeters think they are.
Many simpletons like myself, can take a fair stab at estimation of corporate value. “Book Value” is now a MEANINGLESS TERM. It’s simply a number that the corporate EC’s feel is suitable, and the accounting profession itself has much blame coming for letting the USA down.
When I started, Accountants were respectable people. More than Lawyers at least. Now, many of the people calling themselves Accountants-have no honor, no standards, no believability.
Hey Corporate Guys, the Market does NOT BELIEVE ANYMORE and has little reason to start believing again! Nine Billion?? That is probably more than 100% of true value for MS(Good Will??? Mark-To-Market???)
To be even less modest, the Japanese will likely bail out of this capital injection, or simply wait for a true accounting. MS is probably TOTALLY untrustorthy. It would be the most sensible to wait for bankruptcy and acquire what is still worthwhile for $3/4 Billion.
Buffet may have made a poor decision with GS-he may be sort of a Babe-In-The-Woods in respect to Wall Street chicanery. Or maybe he is looking to control the Treasury thru GS?
I for one don’t like all these GS flunkies assuming regulatory positions, GS(vid AIG) probably triggered this mess, unwittingly of course, they don’t understand the consequences of their own actions.
George C. Harter
— Posted by George C. Harter
2008
4:24 pm
Old JP must be rolling in his grave. He’d have never let things get so out of hand. And he’d have never put a cent of his own money into these devivatives. Goverment securities all the way!
Abby
— Posted by abby
2008
4:32 pm
SWFs (Soverign Wealth Funds) are not permitted to own more that 5% equity stake in US financial institutions. Good idea would be for Private Equity funds (provided their LPs have not backed out of the fund and/or defaulted) to do a MBO and restructure the ailing bank. Additionally, SWFs can provide a credit revolver against warrants (not preferred or convertibles) which would prevent further equity dilution. There are other ways to structure the bank but the most important step would be to get the greedy executives of the bank out of the door first and then bring in a management which can help to restore Morgan Stanley’s financial health, reputation and adheres to a compensation policy which is is truely tied to increamental performance enhancements.
— Posted by L84AFUND8
2008
4:58 pm
I agree with #13. The short selling has to be banned immediately and until this finanicial crisis is OVER. Cox needs to be fired.
— Posted by Joy
2008
4:58 pm
Why would someone put $9 billion in a failed company with who knows what debts? Wouldn’t it be easier to take the $9 billion, then hire the whole JP Morgan staff and start a new bank with no debts? Isn’t that the solution to the whole thing, let the current investors fail and let new investors appear? Come on, take it private…senseless.
— Posted by William Yates
2008
5:16 pm
#2 - I like your strategy. Who is SWF?
— Posted by SouthWorld
2008
5:31 pm
Try buying 1.1 BILLION shares of MS at the market and see what happens to the share price. It would obviously skyrocket, which is why $9 billion won’t buy the company.
And as far as mark to market goes, it, like democracy and capitalism certainly aren’t perfect, but it beats the alternatives. Mark to market accounting didn’t create this mess; greed, stupidity, and recklessness did.
— Posted by Dan
2008
6:39 pm
If Morgan and Goldman aren’t buying their own shares like crazy maybe they know something we don’t know.
— Posted by N.G.
2008
6:48 pm
Gentlemen,
having Jamie Dimon probably very much busy trying to help to solve the actual financial market mess, could you please refer specifically in your titles which Morgan bank are you talking about? Certailnly it is not
J.P Morgan Chase!
Carlos E. Comesana - Former executive at JPMorgan -
— Posted by Carlos E. Comesana
2008
6:51 pm
I think Mitsu should go through with the deal for a fourth of the company. Even if MS had to eventually pay them back a portion, the big thing is Mitsu would be established in the US as a major player. MS/Mitsu will very successful worldwide. Other companies want to take them out before they get that chance. I absolutely believe MS has the smartest, best people in the business…and Mitsu has the money.
— Posted by Ruth C
2008
6:59 pm
If there was ever a time for a share buyback it would be now. I agree that you couldn’t buy 1.1bn shares of MS at market. But, MS and partners could have bought back 100 million shares today at an average price of around $8 (it only rose in the last hour of trading). Then, they could try to buyback another 100 million the next day and a few more days. Soon all the “float” would be shrunk and shorts would be squeezed. Eventually, they would have to register with the SEC on the percentage owned and then they could make a MBO at say $17/share. This way MS could protect the viability of the firm. The purchase is the easy part. The actual running of the firm would require substantial paring down of risk and expenses and bonuses would be paid in retained partnership earnings rather that cash dolllars. The business would shrink, but the “old” Wall Street of high leverage and high risk is not being rewarded.
— Posted by hammer
2008
7:08 pm
Both #1 and #2 assume NPV(net present value) of MS remains in positive territory.
What if the shorts know something, e.g., that MS carries $100 billion in bad debt making a NPV of negative ten billion dollars?
That’s why I’m not lending MS $9 billion, no thanks. Anyone who hasn’t crunched the numbers, done due diligence simply couldn’t possibly know.
— Posted by Han
2008
7:32 pm
I have been reading posts & blogs on the internet regarding MS & this is the first message board where people are actually saying things that are logical and make sense. I like what the first blogger said because that would take the short sellers out of the game. I do not think that the U.S. government or the Japanese government would let MS fail like Lehman Brothers. That scenario could lead to a total collapse of the fragile financial system. One factor I have not read anything about is that the Japanese culture prices a very high value on honor, so I think it is highly likely that MUFJ will figure some way to honor the deal. At least I certainly hope so for the sake of everyone.
— Posted by Scott Jelen
2008
7:54 pm
As attractive as taking both MS and GS private may look right now (GS could probably legitimately go to its employees and ask them to forgo cash comp in exchange for large stakes), it’ll never happen. Why? Because the business model of these banks has changed fundamentally since GS went public in 1999. You absolutely HAVE to have access to the public equity markets if you are going to be engaged in balance sheet intensive businesses like sales and trading (for customers, not the prop trading). Obviously you need even more balance sheet to do prop trading, but just running a franchise S&T business requires public markets access. Because otherwise when partners pull out capital each year, you run the risk of a classic run on the bank by both your partners on one side and your customers on the other. While this may happen to MS or GS anyway as a public company, it is much more likely as a private company. That’s a tough place to be. The only private companies going forward in the space will be the ones that only provide M&A and restructuring advice.
— Posted by M Weber
2008
9:34 pm
I don’t think it is a question of honor. It is a business decision.
If MUFJ does not re-negotiate, the MUFJ executives will have to explain why they paid $9 billion for 21 percent for MS, when MS is worth only $8.4 billion.
Fiduciary duty in the executive suite is universal, as long as the aggreement has not been officially ratified, it is subject to change by all parties.
If MS’s stock prices when up to $100, would MS re-negotiate with MUFJ? You bet they would.
If MUFJ does not re-negotiate,they need to hire lawyers to defend them against their shareholders lawsuits. They would also need to go to Omaha and learn from Buffet.
— Posted by Peter
2008
10:39 pm
Get ready for a Kabuki rendition of force majeure.
— Posted by williambanzai7
2008
7:42 am
Why dont the executives/employees who got 37billion in compensation last year 2007..from goldman and morgan …step up and put some of their money where their mouths are instead of wanting the world to save them and take hard earned tax payer money?
— Posted by Nars
2008
10:44 am
Please don’t lose sight of the forest for the trees. Remember, Morgan Stanley is the best deal maker in the business. They love looking at the ultimate solution and then putting the pieces together to get there. Here is the latest whisper: MS laid out the battle plan for the Wachovia-Wells Fargo merger when they had “exploratory talks with WB. The next phase is for WB-WF to join with MS. Final phase is for the new entity to start rolling up regionals (e.g. UnionBankCal as a starter) and create the major international( don’t forget Mitsu) banking institution in the world. God speed.
— Posted by salsamperi
2008
12:07 pm
There were questions about the solvency of Bear and Lehman that don’t exist with MS. Analysts say the book value of MS is in the high 20’s. MS does not need to access the credit markets for at least a year or longer, therefore unlike Bear and Lehman it can ride out the attacks on the CDS and fear induced credit agency negative watch changes. As a bank, MS can now access cash using the 80% of its assets that can be lent to the Federal Reserve for cash, which is a substantial backstop against a run on the bank.
I hope they don’t have to renegotiate the Mitsubishi deal as it would dilute holders punitively. If renogitaions are required, I hope MS can instead be the first to get a Buffet like injection, but this time from the Treasury’s TARP and tell Mitsubishi no thanks.
Some questions swirl in my head. Why couldn’t we waive the 5 day waiting period that is delaying closing this deal? Why are we back to unfetterred short selling - what about bringing back the uptick rule that worked for decades?
— Posted by Bob R.
2008
1:05 pm
RE: #26, I doubt the Japanese sense of honor includes doing a deal that no longer makes sense.
All of the posts that suggest mergers with foreign banks seem to ignore the political implications of ceding control of these grand institutions to foreign interests. I would guess that a lot of Fed/Treasury actions of late are an attempt to prevent this from happening?
— Posted by Karl
2008
6:56 pm
Morgan has been targeted by short sellers to fail.
On September 15, 2008 the number of short sales executed on Morgan Stanley more than tripled the average short sale volume of the previous 9 trading days as it spiked to over 7.6 million shares from an average of 2.5 million shares. The market closed down on the day over $5.00 closing at $32.19. September 16 witnessed another doubling in short volume to 15 million shares as the volatility in Morgan Stanley grew with a trading range of $23.00 – 32.00 closing at $28.00.
September 17, 2008 witnessed a doubling again as 30 million shares were shorted on that day and the markets volatility increased as well with the days trading range spiking between $16.00 and $26.00/share closing at $21.00. And finally, September 18, 2008 volatility ranged from 411.70 to $24.72 before closing at $22.55. On that day the short sale volume was 21 million shares.
This was what the SEC was witnessing and this is what they responded to in the short sale ban. I expect we will see similar trade data come out of last week.
— Posted by Dave
2008
12:46 pm
Short Seller has been with us since the beginning. They play an important role in price discovery. If short sellers can bring down a stock’s price for a long period of time, that tells me the stock was not priced properly.
Currently, buyers are on the sideline, they are not buying until they see light at the end of the tunnel. The only light they see is lights from a runaway train at the end of the tunnel heading towards them. Hedge funds and others who find themselves having to raise cash must sell in this market thus making it go lower.
It is sad to say, but in a capitalist society weak businesses perish and strong businesses survive and get bigger. We are going thru another cycle of cleaning out the excesses that has been built up in our economy over the decades. The current hard times will pass. Now is the time to do research to find great value so you can upgrade the companies in your securities portfolio.
— Posted by Peter
2008
1:14 pm
@32 - They have been buying more of the companies’ stocks. Most of the senior management at MS bought in at around $8 on Friday. A lot of other people have increased their 401K allocation toward the company stock fund as well. It makes sense - if they make it this time, they’d make a huge profit. If they don’t, then the economy would be impaired to the point where that money won’t really save anything anyways.
— Posted by Chris