NEW YORK Morgan Stanley plunged by as much as 25 percent on Thursday on concern about the status of a planned $9 billion investment by Japan's top bank, Mitsubishi UFJ Financial Group Inc.
But once again, the bank shot down speculation about the deal and some traders blamed the plunge on short-sellers after the end of a temporary ban on such trading, helping the stock recover some of the losses.
"As Mitsubishi said yesterday, the deal is scheduled to close on Tuesday and nothing has changed," Morgan Stanley spokesman Mark Lake said.
A source close to Mitsubishi UFJ said nothing had changed since its statement on Wednesday, when the company said it had no plans to back out of the investment, despite a recent sell-off in the New York-based firm's shares.
Morgan Stanley shares were down 15.9 percent at $14.13 in afternoon trading, the biggest decline on the Amex Securities Broker Dealer index, which was 1.2 percent lower.
Morgan Stanley debt protection costs rose 7 percentage points to around 25 percent upfront, according to an analyst.
Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati, said the stock's fall was due to ongoing concerns about the deal.
"There is continued unease about the prospects of the Mitsubishi deal going through and that has also impacted (their) credit default spread," McCormick said.
"The market is definitely trading on rumors, not news, and if there's any type of potential problem, traders are quick to head for the exits on any stocks, but even more so on financials like Morgan Stanley."
Others said the end of a nearly three-week prohibition on investors' ability to make bearish bets on financial stocks could be a factor.
"You can short Morgan Stanley today," said one trader, speaking on condition of anonymity. "Also, that $8 billion infusion will not be enough to fix their problems."
Another trader, who specializes in takeover stocks, also speaking on the condition of anonymity, said it was "crazy rumors again, but not necessarily anything behind it but short-sellers."
Bank of America Corp's planned takeover of Merrill Lynch & Co Inc and the bankruptcy filing of Lehman Brothers Holdings Inc have left Morgan Stanley and Goldman Sachs Group Inc as the sole surviving independent brokerages.
Both have become bank holding companies to reduce their reliance on short-term capital markets.
"I think, longer term, now that they have converted to a bank holding company structure as opposed to an investment bank, they need to do what all these others are doing -- which is look for a low-cost, stable source of funding," said David Dietze, chief investment strategist at Point View Financial Services, which holds some Morgan Stanley stock.
(Reporting by Christian Plumb, Jennifer Ablan, Elinor Comlay, Jessica Hall, Phil Wahba and Paritosh Bansal; Editing by Brian Moss and Andre Grenon)