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Morgan Stanley Plunge Looks Eerily Familiar

Morgan Stanley continues to face a crisis of confidence that shows no signs of abating, and while it has tools at its disposal that the collapsed Bear Stearns and Lehman Brothers did not, the panicked market has little patience for such subtleties.

Updated from Friday, Oct. 10

Morgan Stanley

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made it through the weekend in an eerily familiar state for a player in the battered financial sector, its stock under assault due to a crisis of confidence showing no signs of abating.

With its stock closing down more than 22% Friday afternoon to below $10 a share, Morgan Stanley's situation brings to mind the collapse of

Bear Stearns

earlier this year and the events leading up to

Lehman Brothers'

bankruptcy filing last month. And while Morgan Stanley has capital and other tools at its disposal that its two former rivals did not, in its current state of panic, the market has little patience for such subtleties.


One must hold one's breath at the moment and hope this is a different movie," Ladenburg Thalmann analyst Richard Bove wrote in a research note Friday.

The credit crisis has exposed the extreme vulnerability of former investment banks to the whims of the market. These companies depend upon a network of lenders and trading partners who have the ability to pull the plug on them as soon as they fear that their money is at risk.

That is what happened to Bear, which forced the firm to sell itself to

JPMorgan Chase

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at a punishingly low price in a deal brokered by the government. It also led Lehman Brothers to file for bankruptcy last month, the same weekend

Merrill Lynch


struck a deal to sell itself to

Bank of America



According to a report in

The Wall Street Journal

, the undoing of Lehman came when JPMorgan demanded $5 billion in additional collateral.

But if analysts are correct, Morgan Stanley could withstand several such shocks. A report from Barclays Capital released Friday morning estimates Morgan Stanley has $100 billion to $115 billion in liquidity. Bove puts that number considerably lower, at $50 billion.

Morgan Stanley could see a sharp rebound in its stock if it can make it to Tuesday. That is when a $9 billion equity investment from Japan's largest bank,

Mitsubishi UFJ


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, is due to fund. There has been nervousness in the market that Mitsubishi will pull out, as its investment at $25 per share is down by about 75%.

But Mitsubishi issued a press release Friday morning reiterating its commitment.

"They knew what they were getting into. They knew our stock would go into the single digits," says Morgan Stanley spokesman Mark Lake.

Mitsubishi could not be reached for comment.

However, there are reports Monday that Mitsubishi is seeking more favorable terms to its deal to acquire a 21% stake in Morgan Stanley.

The Japanese lender still plans to buy the stake, but will amend the terms to include only convertible preferred shares and no common stock,


reports, citing a source.

The new terms of the deal will allow Mitsubishi, Japan's largest bank, to buy preferred shares that will convert into common stock at a price range of $20 to $25,


reports. This was down from an initially negotiated price of $31.25 as Morgan Stanley's shares more than halved last week, reducing the company's market value to just $10.3 billion.

The U.S. government was involved with the talks but isn't contemplating a direct investment alongside Mitsubishi, the


reports, citing one person familiar with the talks.

However, to help protect the Japanese bank, the U.S. government was contemplating a structure in which any possible future government investment in Morgan Stanley wouldn't wipe out Mitsubishi's investment, the newspaper reports.

Anton Schutz, president of Morgan Stanley shareholder Mendon Capital, believes Mitsubishi will stick to its commitment for fear of upsetting U.S. regulators if it does not. Mitsubishi recently bought

Union Bank of California


, so it has reason to want to be on good terms with U.S. regulators, Schutz points out.

Schutz even thinks Mitsubishi could end up swallowing Morgan Stanley whole. "Certainly they'd be getting it at a great price," he says.

Schutz believes the U.S. government could take an equity stake in Morgan Stanley. Schutz argues that since it became a

bank holding company

, government regulators could plausibly claim Morgan Stanley is a different animal than Lehman, which they allowed to fail. The

Federal Reserve

also has increased the types of collateral it will accept in exchange for short-term lending.

Schutz also believes regulators have a different view of the world than they did last month.

"I think if you asked the regulators if they thought letting Lehman fail was a mistake, I think they'd tell you it was," he says.

Still, the market is obviously not convinced.

"After seeing my buy recommendation on Lehman turn into a bankruptcy, I would not be willing to certify any result for Morgan Stanley at this point," Bove wrote on Friday.