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Morgan Stanley, Mitsubishi Say "I Do"


Japanese bank takes 20% stake in Wall Street survivor.

A collective sigh of relief just went up in the narrow boulevards of lower Manhattan - and it's not just because the Federal Reserve said it will lend out unlimited amounts of dollars to help prop up the global financial system: Morgan Stanley (MS) managed to secure its capital infusion from Japan's largest bank, Mitsubishi UFJ Financial Group (MTU).

Just weeks ago, when the transaction was first announced, Mistubishi's agreed to hand over $9 billion for a 20% stake in the storied Wall Street firm. But during the market's train wreck last week, shares of Morgan Stanley sunk below $7 on concerns the deal would be derailed.

At those levels, the Japanese bank could have picked up the entire firm for less than the proposed injection.

Nevertheless, after a weekend of what must have been intense negotiations, the 2 sides agreed on a deal.

According to the Wall Street Journal, Mitsubishi picked up $7.8 of convertible preferred stock with a conversion price of $25.25 per share, along with $1.2 billion of non-convertible preferred shares. Both investments carry a 10% dividend, which seems to be the going rate for equity positions in former-investment banks (Warren Buffett is earning a similar dividend on his investment in Goldman Sachs (GS)).

The deal comes without any implicit backing from the US government - though Bloomberg, citing the New York Times, reports federal officials told Mitsubishi its investment would be "protected." It's unclear whether there will be specific guarantee slapped on the deal, or if the government simply implied its plans to inject cash into troubled financial institutions will keep Mitsubishi's money safe.

The 2 firms are already forging a strategic partnership, identifying several areas of cooperation: Corporate and project-related loans, investment banking and certain aspects of retail banking and asset management.

Both Morgan and Goldman are paying a high price for private capital; 10% is nothing to scoff at for what are alleged to be strong financial institutions. That also sets the bar for what taxpayers should expect to earn when the Treasury Department starts taking equity positions in American banks.

Existing shareholders, already fretful these equity investments will be highly dilutive to existing shares, now have to worry that the high cost of capital will eat into future earnings. According to Bloomberg, Morgan's annual payout to Mitsubishi could be as much as 16% of next year's profits.

In the coming weeks, as details emerge about Treasury's plans, taxpayers should be up in arms if they're not duly compensated for being investors of last resort.
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