Japan May Want to Buy Gold, Not Morgan Stanley: William Pesek

Commentary by William Pesek
Enlarge Image/Details

Oct. 13 (Bloomberg) -- Looking at the morning headlines, many of us in Tokyo are tempted to have a side of whiskey with our coffee. Or skip the java and go just for the booze.

None more so than the folks at Mitsubishi UFJ Financial Group Inc., who are about to sink $9 billion into Morgan Stanley. That move seemed brilliant when it was announced last month. Today, it looks a bit troublesome as shares in the fifth-biggest U.S. bank-holding company drop.

Moody's Investors Service said Oct. 10 that Morgan Stanley's credit rating may be cut as the global market slump threatens profits. Chief Executive Officer John Mack last week dismissed rumors Mitsubishi UFJ was having second thoughts. According to reports today, the banks are discussing altering the terms of the deal.

Should Mitsubishi UFJ pull out? One really has to wonder.

Given the way markets are cascading lower and global recession risks are growing, Japan's biggest bank is almost better off speculating in companies that produce scotch, canvas tents and canned soup. And then there's gold, which will surge further as the dollar's value dwindles.

Mitsubishi UFJ sees Morgan Stanley as a long-term investment, a chance to grab a piece of a fabled Wall Street giant humbled by market turmoil. And relative to U.S. peers, Japan's banks are solid, having spent the 2000s writing down bad loans and avoiding risky, hard-to-value investments.

Wouldn't it be a shock if after years of conservatism, a major Japanese bank lost big on a renewed foray overseas?

Acquisitive Japan

Much has been made of how Japanese companies are increasing foreign acquisitions, using their cash-hoards to grab assets beaten down by the credit crisis and unfolding economic slowdown.

Takeovers by companies including Nomura Holdings Inc., TDK Corp., Daiichi Sankyo Co. and, potentially, Mitsubishi UFJ put Japan on course for its biggest buying spree since the 1980s bubble. Back then, Japanese buyers overpaid in a huge way for assets such as New York's Rockefeller Center and California's Pebble Beach Golf Links.

The key for Mitsubishi UFJ CEO Nobuo Kuroyanagi is to heed the lessons of Japan's bubble years. Complicating things is how difficult it is to value assets -- and, by extension, a company's worth -- in this market environment.

Take Korea Development Bank's ill-fated flirtation with Lehman Brothers Holdings Inc. The South Korean bank offered $6.40 a share for a controlling stake in Lehman in the weeks preceding the U.S. firm's bankruptcy last month. Lehman CEO Richard Fuld wanted more.

Asia's Power

The unraveling of the deal left the Korean bank looking quite savvy given what we later found out about Lehman's health. It displayed the real power of savings-rich Asia as U.S. companies bleed capital.

The saga also may get Fuld into hot water. On Oct. 7, U.S. lawmakers grilled him about a Sept. 10 conference call in which he said Lehman's capital reserves were adequate. Representative John Mica, a Florida Republican, asked whether Fuld knew then that Lehman wasn't getting an investment of $3 billion to $5 billion from Korea Development Bank. Fuld said: ``There certainly was no intent to mislead.''

Betting on Morgan Stanley is an even bigger roll of the dice for Mitsubishi UFJ. On one level, Morgan Stanley would seem as good as any U.S. financial company in which to grab a 21 percent stake. On another, who really knows these days?

Risk Factor

In its statement, Moody's hardly suggested the firm is a basket case.

``Morgan Stanley's recent performance has been relatively solid, it has acted to solidify its capital base, it has maintained a good liquidity profile, and it has benefited from a level of systemic support that is factored into the rating,'' Moody's said.

For Mitsubishi UFJ, the risk is quite different from Nomura's purchase of Lehman's Asia-Pacific business. Nomura bought the carcass of a bankrupt company without taking on a potentially risky balance sheet. Mitsubishi UFJ risks buying into a terminally ill patient.

The point isn't to pick on Morgan Stanley. Yet one is hard- pressed to rule out a bad ending for the gamut of financial institutions amid such turmoil.

Consider the experience of sovereign wealth funds. How happy can China be with its multibillion-dollar investments in Blackstone Group LP and Morgan Stanley. Ditto for Singapore, which invested in Merrill Lynch & Co.

It's impossible to know what Mitsubishi UFJ will do. If it sticks to Plan A, the Morgan Stanley deal could be closed as soon as tomorrow, when the Federal Reserve-imposed waiting period expires. Or Mitsubishi UFJ may renege, concluding it risks throwing good money after bad as economies swoon.

Weighing the interests of shareholders won't be easy. If markets rebound soon, Mitsubishi UFJ stockholders will cheer the deal. If Morgan Stanley goes the way of Lehman or Bear Stearns Cos., investors will be livid.

Whatever Mitsubishi UFJ decides, one thing is clear: The risk of buyer's remorse has never been bigger in a global system that has never been so shaky.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net