Morgan, MUFG Are Renegotiating Deal

Morgan Stanley and Mitsubishi UFJ Financial Group are renegotiating the terms of their deal in which the big Japanese bank had initially agreed to sink $9 billion into Morgan for a 21 percent stake in the venerable investment house, CNBC has learned.

According to a person familiar with the talks, the two sides are "negotiating a different structure" that would allow Mitsubishi to invest around $9 billion and maintain a minority stake into Morgan Stanley even though the firm's market value after Friday's close is around $10 billion.

One person close to the renegotiation talks says the deal as of now includes Mitsubishi taking its 21 percent stake through a $9 billion investment and receiving all its interest in preferred stock. The two sides are also negotiating a massive line of credit to Morgan, this person says. This would allow the deal to conform to US banking laws that prohibit foreign ownership of more than 25 percent.

People with knowledge of the discussions say the situation is fluid and subject to change, but both sides might announce the new terms later Sunday evening or early Monday morning.

It's unclear if the federal government, under a plan recently announced by Treasury Secretary Hank Paulson, will directly infuse Morgan with capital. The person close to Morgan says a federal money is not currently being discussed, but that too could change, particularly if the Mitsubishi negotiations break down.

A spokeswoman for Morgan didn't return repeated calls for comment.

Under the initial terms of the deal, Mitsubishi agreed to invest a total of $9 billion into Morgan, $6 billion of which was preferred shares and $3 billion comprised of common stock. But that was before shares of Morgan Stanley were hammered last week amid continued worries over its long-term stability.

Morgan Stanley's market value dropped so low that by investing $9 billion, Mitsubishi would effectively own Morgan Stanley.

People close to Morgan say the Treasury Department is closely monitoring the situation at Morgan, as well as Goldman Sachs, which has seen its stock hammered in recent days as well, albeit to a lesser degree.

Under John Mack, who took over as chief executive in June 2005, Morgan Stanley took on more trading risk and expanded in lending and mortgage businesses that have proven to be the biggest money losers of the credit crunch.

Yet since the bank wrote down more than $9 billion of assets last December, Morgan Stanley shifted to defense. It shed assets, reduced leverage and raised $5 billion of capital from China Investment Corp -- a move that made it look smart as Bear Stearns and Lehman Brothers crumbled for lack of willing investors.

Race Against Time

In a related development, European leaders raced against the clock on Sunday to craft a rescue strategy for banks hit by the worst financial crisis since the 1930s, focusing on pledges to recapitalize banks or buy debt they issue.

According to a draft statement circulated at a summit in Paris, leaders from the euro currency area were working on a plan that includes commitments to provide capital, and to insure or directly buy into debt issues.

Meanwhile, Goldman Sachs , the fourth-largest U.S. bank, is by no means out of the woods.

Despite raising $10 billion from Berkshire Hathaway, the holding company run by billionaire Warren Buffett, and public investors, Goldman's stock price also came under attack.

-- Reuters contributed to this article

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