Morgan Stanley ( MS) shares rallied 86% Monday after the firm closed a big equity infusion that the market had feared might not happen, but it may be too soon to say the firm's future is secure. Morgan Stanley and Mitsubishi UFJ Financial ( MTU) on Monday closed a sweetened deal that gives Japan's largest bank a 21% ownership stake in the struggling Wall Street firm. A deal was originally announced Sept. 22, but Morgan Stanley investors fretted whether it would close since shares last week slipped below what Mitsubishi originally had agreed to pay. "Morgan Stanley almost got put out of business last week because the market was worried about them," says Ben Wallace, analyst at Grimes & Co. The Westborough, Mass.-based wealth manager does not own shares of either Morgan Stanley or Goldman, for fear that they are too vulnerable to sudden shifts in market sentiment. Morgan Stanley rival Goldman Sachs ( GS) also has been hit by plummeting confidence in the business models of traditional investment banks, which has led to the disappearance of Bear Stearns and Lehman Brothers, and pushed Merrill Lynch ( MER) to agree to sell itself to Bank of America ( BAC) on Sept. 15 for about 40% of where it had traded a year earlier. Morgan Stanley and Goldman have taken several steps to try and stave off such a fate, including registering with the Federal Reserve as bank holding companies and securing large equity infusions from outside investors. In addition to the announcement of Mitsubishi's Morgan Stanley investment last month, Goldman benefited from a $5 billion investment from Warren Buffett's Berkshire Hathaway ( BRK-A) a day later.
While those measures temporarily stabilized the freefall in shares of the two firms, the selling resumed when doubts began to emerge about whether Morgan Stanley's deal would actually close. When it did, on slightly revised terms, Morgan Stanley's stock reversed course. Having fallen close to 60% last week to close at $9.68 on Friday, Oct. 10, shares rose 87% to $18.10 Monday. Goldman shares plummeted more than 12% on Friday, but the stock closed up 22% to $111 after Monday's rally. Brad Hintz, analyst at Sanford Bernstein, believes Morgan Stanley is not at risk of the kind of institutional bank run that swamped Bear Stearns and Lehman, chiefly because the Fed stands firmly behind it. While he stresses that the firm needs to regain the ability to raise long-term debt, he estimates it still has until the third quarter of next year to do that, by which time he expects the markets to have calmed. "Between now and then is a long time in the world of capital markets, and at some point, counterparties say, 'Well, they're not going away.' And once you have that perception of not going away, then you're back with access to the capital markets," Hintz says. Hintz does not expect Morgan Stanley to try to raise more equity, as he believes the firm has sufficiently reduced its leverage to allay investor concerns. Morgan Stanley spokesman Mark Lake says the firm currently has no plan to issue more equity, but does not rule out that possibility. Spokespeople for Goldman did not respond to email messages.
Grimes & Co.'s Wallace believes beefing up retail deposits is the only way Goldman and Morgan Stanley can change the market perception that they are more vulnerable to a bank run than more retail-oriented banks such as Citigroup ( C). "As long as they don't have a
substantial deposit base they're going to be more vulnerable," he says. "Deposits are more stable. They're more liquid, and in theory they could run out the door all at once but they have the Federal Deposit Insurance Corp. insurance unlike trading partners, etc. who can run out the door." Morgan Stanley's Lake says that while the company wants to increase deposits, it does not believe it has to do so to ensure its survival. "Mitsubishi standing behind us answers that more," he says, noting that Mitsubishi is also considering lending to Morgan Stanley. Mitsubishi could not be reached for comment.