Morgan Stanley Shares Hit by Fears About Future

Morgan Stanley and Goldman Sachs shares slumped on Friday after Moody's Investors Service said it might cut their ratings, reviving concerns about the viability of their banking models.

Stock of Morgan Stanley, the No. 2 independent investment bank after Goldman, fell 43 percent on doubts that a planned $9 billion cash injection from Mitsubishi UFJ Financial Group (MUFG) would be enough to enable the company to ride out the current crisis.

Morgan Stanley shares have lost about 70 percent in the past week and are at their lowest in nearly 14 years on worries that MUFG may back out of the cash-injection deal. Both companies have given assurances that it would close on Tuesday.

Goldman Sachs Group shares were down 20 percent on worries about Morgan and the broader financial turmoil. The Amex Securities Broker-Dealer Index shed 10 percent.

"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," David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller, said in a research note. "However, as we've seen with Bear Stearns and Lehman, once the fear virus has infected the story, it is tough to shake."

Morgan Stanley stock dropped to an intraday low of $6.71 on the New York Stock Exchange Friday. More recently it trimmed losses to trade just below $8—marking a decline of about 37 percent from yesterday's close.

Worries around Morgan also dragged down its closest rival, Goldman Sachs , which was down about 15 percent.

MUFG's US-traded shares were down almost 11 percent Friday.

Friday's stock decline came despite assurances from both Morgan Stanley and MUFG that the deal was expected to close on Tuesday.

A MUFG spokesman said it had no plans to change its investment plans. That echoed a statement released by MUFG Wednesday in which the bank dismissed the speculation it could pull out as rumors with "no basis."

For the past week, Morgan Stanley has reiterated that the $9 billion investment by MUFG will go through. (See the accompanying video for more on how Morgan Stanley is fighting back against market rumors and speculation.)

Morgan Stanley, which became the fifth-largest U.S. bank after conversion to a commercial bank, has little choice but to wait for Tuesday, when it can complete its $9 billion sale of stock and convertible preferred shares to Mitsubishi. The deal could be completed before U.S. markets open on Tuesday.

People inside the bank say there was no effort under way to accelerate the waiting period for the Mitsubishi deal.

MUFG has affirmed it expects to close the deal on Tuesday at the same terms, even though it would immediately absorb a $2 billion paper loss on the stock, based on current prices.

Morgan Stanley also said it does not plan to issue new common stock in a public offering, as Goldman did after billionaire investor Warren Buffett bought into the firm. It also is not likely to pursue other capital deals because they would dilute MUFG's holding and possibly scuttle that deal.

Moody's warned Friday it might cut the long-term debt ratings of Morgan Stanley and Goldman, which would increase their cost of borrowing.

"The Mitsubishi transaction hasn't closed yet ... I think there's a legitimate concern that that deal doesn't go through," said Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis. "Once (the Moody's announcement) hit last night, people jumped to the Lehman Brothers parallel."

Sources told CNBC that Morgan Stanley executives were taken aback by the Moody's report and questioned why the ratings agency released its announcement prior to the MUFG transaction's completion.

CONTINUED : 'On the Ropes'?

---

1 | 2 | Next >