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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.
"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.
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.
Morgan Stanley, whose shares have lost about 70 percent in the past week and are near their lowest in nearly 14 years, declined to comment on the movement in its stock and debt, or on speculation about the MUFG deal.
The 73-year-old firm, which became the fifth-largest U.S. bank after its recent conversion to a bank holding company, has little choice but to wait for Tuesday, when it could complete its $9 billion sale of stock and convertible preferred shares to Mitsubishi. The deal could be completed before U.S. markets open on Tuesday.
People inside the bank say there was no effort under way to accelerate the waiting period for the Mitsubishi deal.
MUFG has affirmed it expects to close the deal on Tuesday at the same terms, even though it would immediately absorb a more than $2 billion paper loss on the stock, based on current prices.
Shares in Goldman, which declined to comment on the Moody's move, were down 12 percent. The Amex Securities Broker-Dealer Index rose 3 percent.
Roughly 489,000 options traded in Morgan Stanley, twice the normal daily turnover as puts outpaced calls by more than 3 to 1, according to option analytics firm Trade Alert.
The cost to insure Morgan Stanley's debt against default rose on Friday, indicating investor concern about its financial stability. The bank's five-year credit default swaps rose to an upfront payment of 24 percent of the sum insured, plus 5 percent a year, from 19 percent on Thursday, according to Phoenix Partners Group.
That means it would cost $2.4 million to insure $10 million of debt plus $500,000 a year.
"The ratings might be cut and if you look at the credit default swaps are kind of blowing out ... Maybe Morgan Stanley is the next company to be on the ropes or in deep, deep trouble," said Ken Crawford, senior portfolio manager of Argent Capital Management in St Louis.
Moody's said its review was "based upon its expectation that an extended downturn in global capital market activity will reduce Morgan Stanley's revenue and profit potential in 2009, and perhaps beyond this period."
Still, Moody's noted that Morgan Stanley had moved quickly to reduce risk on its balance sheet and decrease leverage, and said the firm has a "good liquidity profile."
According to a Morgan Stanley filing with the U.S. Securities and Exchange Commission on Thursday, the company had $175 billion of average liquidity at the end of August, of which $81 billion was at the holding company level.
It had a tier 1 capital ratio of 12.7 percent at the end of August and $23 of assets for every dollar of equity.
Veteran Ladenburg Thalmann bank analyst Richard Bove cited the MUFG comments, along with disclosures in Morgan Stanley's latest quarterly regulatory filing that it had minimal exposure to Lehman Brothers' counterparty risk, as positive developments.
Still, he wrote in a research note: "Confidence is still the key variable in this story as it was in Bear Stearns and Lehman."
Shares of Mitsubishi UFJ fell 8.5 percent to 710 yen, in line with a 9 percent drop in Tokyo's index of bank stocks.
Additional reporting by Sachi Izumi, Jennifer Ablan, Doris Frankel, Tony Munroe, Dan Wilchins, Juan Lagorio, Paritosh Bansal and Elinor Comlay and Kristina Cooke, and David Dolan in Tokyo; editing by Steve Orlofsky and Gerald E. McCormick