NEW YORK -- Morgan Stanley MS shares plunged more than 22% Friday as investors questioned the investment bank's future even with a major investment from Japan's Mitsubishi UFJ Financial Group.
Friday marked the fifth straight day that shares of the nation's second-largest investment bank have been pummeled. The latest round of selling was triggered on renewed fear that Morgan Stanley's credit ratings might be cut, a move that threatens earnings power.
The potential for a downgrade heightens pressure on Chief Executive John Mack, who spent most of Friday meeting with major investors to reassure them about the firm. Most of Wall Street remains painfully aware that many of Morgan Stanley's rivals have either collapsed or been sold off as confidence in the financial industry plummeted.
And, analysts on Friday agreed that Morgan Stanley's shares have come under intense pressure — more on fear than any real problems with the bank. Investors wiped away about $18 billion of value in Morgan Stanley in the past week, with shares closed down $2.77, or 22.3%, to $9.68 after sinking to a 52-week low of $6.71 earlier in the session.
"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," said David Trone, an analyst with Fox-Pitt Kelton. "We expect the firm to get major funding support from Mitsubishi, with details to emerge on Tuesday when the transaction is formally closed."
The steep drop in the investment bank's market value is reminiscent of what happened to both Lehman Brothers and Bear Stearns, said Ladenburg Thalmann analyst Richard Bove in a research note. Short selling has been cited as a reason Lehman filed for bankruptcy protection and for Bear Stearns being acquired by JPMorgan Chase in a fire sale.
He said there is some indication that short sellers, who bet on stocks falling instead of rising, might be putting pressure on shares. On Thursday, a three-week ban on short selling expired.
"The focus on Morgan Stanley is to change the ending," Bove wrote in the note. "In sum, one must hold one's breath at the moment and hope that this is a different movie."
At least for the moment, Morgan Stanley has one important distinction from all the others. The company will formally sell 20% of itself for $9 billion to Japan's Mitsubishi UFJ Financial.
Spokesmen for both Morgan Stanley and Mitsubishi UFJ reiterated on Friday that the deal is set to be completed by Tuesday. There has been speculation in recent days that the transaction could fall apart as the deepening credit crisis makes financial companies even more vulnerable.
Mitsubishi UFJ agreed to pay $6 billion for preferred stock and $3 billion for common stock at a value of $25.25 apiece. That's 50% more than Thursday's closing price.
Both Morgan Stanley and Mitsubishi UFJ are expected to hold meetings this weekend ahead of the deal's closure, according to a person familiar with the situation who asked not to be identified because of not being authorized to speak publicly ahead of the talks.
Pressure on Friday also stemmed from concerns that Morgan Stanley's counterparties and trading partners could lose confidence and pull their business. That's one of the reasons Lehman and Bear Stearns were unable to survive, but Morgan Stanley might be in a bit better shape.
The investment bank has about $900 billion of assets and an equity market value of about $8 billion, and is still considered to be one of the world's most well-capitalized investment banks. A research report from Barclays Capital said Morgan Stanley has between $100 billion and $115 billion of liquid reserves.
Morgan Stanley and Goldman Sachs, the last two Wall Street investment banks standing, have also converted themselves into bank holding companies to help stay in business. Commercial banks have higher asset bases by taking deposits, and are also more heavily regulated.
However, Moody's Investors Service felt that the earnings potential for the company still doesn't look good. The rating agency placed the long-term debt ratings of Morgan Stanley and its subsidiaries on review for a downgrade.
"An extended downturn in global capital market activity will reduce Morgan Stanley's revenue and profit potential in 2009, and perhaps beyond this period," Moody's said in a statement. "Investor, counterparty and customer confidence is critical to the funding and profit generation of the firm, especially in a hostile market environment."