Morgan Stanley’s fate now appears to lie in the hands of Mitsubishi. The two companies insisted through Charlie Gasparino this morning that the $10 billion financing is still on and will close Tuesday. Morgan Stanley also blasted Moodys for sucker-punching it with an effective credit-rating downgrade last night.
Here’s why we’re sceptical about the Mitsubishi deal: Morgan Stanley’s stock is now trading at 40% of the level Mitsubishi agreed to pay ($25). There has to be an “material adverse change” clause in the investment agreement, and a potential ratings downgrade is certainly a material adverse change. So is a 60% collapse in the stock and a major loss of clients (per the WSJ, 40% of Morgan’s hedge-fund clients have bolted in the last few weeks).
Even if Mitsubishi decided it needed a legal defence for backing out of the deal, therefore, there are almost certainly provisions in the investment agreement that it could fall back on. And even if there is no legal defence, it’s hard to see what Morgan Stanley could really do if MUFG just decided not to send the money. [Sue? With what?]
Given the complete erosion of confidence in Morgan Stanley (stock price, Moodys, hedge-fund clients), the Mitsubishi deal is likely its last shot at survival. If Mitsubishi backs out, we expect the Fed to do the same thing it did with AIG, Fannie, Freddie: Step in, take 80% of the equity, inject capital as needed until the firm can be chopped up and sold off in parts.