Japan's MUFG may seek to change M. Stanley deal: report

By Christian Plumb and Joseph A. Giannone

NEW YORK (Reuters) - Mitsubishi UFJ Financial Group Inc (MUFG) could seek to renegotiate the terms of a planned $9 billion cash injection into investment bank Morgan Stanley, CNBC reported on Friday, even as sources told Reuters the deal was still on track to close on Tuesday.

Unidentified people at Morgan Stanley, whose shares ended down 22 percent after earlier losing more than double that, also said it was possible that the U.S. Treasury could end up taking a stake in the firm, CNBC reported.

Even if the deal does close, there were some questions whether the MUFG investment would be enough to let the company, whose ratings Moody's Investors Service has said it might cut, ride out the current storm.

Morgan Stanley looks increasingly wobbly to some investors as its share price plummets, but analysts said the bank would be more likely to find buyers than Lehman Brothers Holdings Inc , whose bankruptcy last month set off a chain reaction which shook investors confidence in much of Wall Street.

In the worst case scenario of no buyers emerging, the government would be unlikely to let the bank fail, a person close to the matter said.

Morgan Stanley's entire market value now stands at $10.3 billion, about $1 billion more than what MUFG, Japan's largest bank, insists it plans to pay for 21 percent of the company.

"THE FEAR VIRUS"

"Morgan Stanley shares have been under extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet, and long-term earnings prospects are sound," David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller, said in a research note.

"However, as we've seen with Bear Stearns and Lehman, once the fear virus has infected the story, it is tough to shake."

Earlier this week, Morgan Stanley Chief Executive John Mack, facing his biggest test since taking the helm in June 2005, warned staffers that the bank would be under siege but urged them to stay upbeat.

Mack, 63, lost a power struggle at Morgan Stanley earlier this decade and left the bank, only to return in 2005 and boost the investment bank's trading risk at what critics said was the wrong time.

A source familiar with the situation denied any renegotiation was going on. Morgan Stanley has received all regulatory approvals for the investment by MUFG, which is expected to close on Tuesday, said the source, who asked not to be named.

The source also denied that any discussions had taken place with the Treasury or U.S. Federal Reserve about their taking a stake in the company.

WAITING GAME

Moody's warned on Friday it might cut the long-term debt ratings of Morgan Stanley and larger rival Goldman Sachs Group Inc, which would increase their borrowing costs and may force them to put up more collateral for trades.