Morgan Stanley Says Mitsubishi Deal `Moving Ahead'

By Christine Harper

Sept. 26 (Bloomberg) -- Morgan Stanley Chief Executive Officer John Mack told employees the firm, whose stock fell as much as 13 percent in New York trading today, is ``moving ahead as anticipated'' with an agreement to raise capital from Mitsubishi UFJ Financial Group Inc.

The two companies on Sept. 22 announced a ``letter of intent'' to pursue an alliance in which Japan's biggest bank would invest about $8.5 billion for 10 percent to 20 percent of the Wall Street firm. The announcement came the day after New York-based Morgan Stanley said it would boost its deposit base as it transforms itself from the second-biggest U.S. securities firm into the fifth-biggest bank holding company.

Stock and bond investors have become anxious about companies that rely on markets for funding after Lehman Brothers Holdings Inc. filed for bankruptcy protection last week. Goldman Sachs Group Inc., Morgan Stanley's larger rival, moved to shore up market confidence this week by raising $10 billion from Berkshire Hathaway Inc. and a public stock offering. The U.S. Congress is debating a $700 billion financial rescue package proposed less than a week ago by Treasury Secretary Henry Paulson.

``It is critical that all of us stay close to our clients to help them navigate these challenging markets,'' Mack said in the memo today. ``I have no doubt that markets will remain volatile and stock prices -- including our own -- will continue to fluctuate.''

Leverage Ratio

With $8.5 billion of new equity from Tokyo-based Mitsubishi UFJ, Morgan Stanley's leverage ratio would drop to 22.3-to-1 from 27.6-to-1 at the end of August. The leverage ratio measures the amount of assets held with each $1 of shareholder equity, with higher numbers reflecting greater reliance on borrowing.

With its $10 billion of new capital raised this week, Goldman Sachs' leverage ratio dropped to 19.4-to-1 from 23.70- to-1 at the end of August.

Shares of Morgan Stanley dropped $2.35, or 8.7 percent, to $24.75 in New York Stock Exchange composite trading after falling as low as $23.52 earlier in the day. The stock is down 53 percent so far this year.

Financial stocks declined today after Washington Mutual Inc. became the biggest U.S. bank failure in history, with JPMorgan Chase & Co. agreeing to acquire the deposits and branches of the Seattle-based savings and loan.

Mitsubishi UFJ's stock has fallen 11 percent so far this year, giving the company a market value of 10.15 trillion yen ($95.8 billion). The bank has taken $1.6 billion of writedowns and credit losses since the U.S. subprime mortgage market collapsed last year, compared with $15.7 billion at Morgan Stanley.

Morgan Stanley, which yesterday said it hired former U.S. Comptroller of the Currency Eugene Ludwig as an adviser on its transformation into a bank holding company, has teams working ``to explore the most attractive opportunities offered by this new structure,'' Mack wrote in the memo today.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.