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Morgan seals deal with Mitsubishi

Embattled Wall Street firm completes deal with Japanese bank, getting $9 billion in exchange for 21% stake; stock stages huge rally.

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By David Ellis, CNNMoney.com staff writer

Will the U.S. lose its position as the world's financial superpower?
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NEW YORK (CNNMoney.com) -- Morgan Stanley wrapped up plans to sell a part of itself to Mitsubishi UFJ for $9 billion, the two companies said Monday, reviving hopes that the Wall Street firm will be able to survive the credit crisis.

Shares of Morgan Stanley (MS, Fortune 500), which plummeted in recent days on speculation that the deal could fall apart, staged an impressive rally, surging more than 85% Monday.

As recently as last week, investors feared that Mitsubishi (MTU) might pull out of the investment altogether, putting Morgan Stanley at risk of suffering the same fate as Lehman Brothers, which collapsed just weeks earlier.

Mitsubishi's decision to renew its commitment to the deal, however, provided some assurances to investors about Morgan's survival.

"A $9 billion pad to their balance sheet doesn't hurt." said Ken Crawford of Argent Capital Management in St. Louis, which manages about $800 million in assets but does not own shares of Morgan Stanley.

The New York City-based bank reportedly spent much of the weekend engaged in talks with Mitsubishi over the terms of the proposed $9 billion stock sale, which was first announced just three weeks ago.

Under the original terms, Mitsubishi had agreed to buy a mix of preferred and common stock of Morgan Stanley but reportedly wanted a better deal as Morgan's market value plummeted in recent weeks.

Still, Monday's announcement revealed that the conditions of the deal did not change all that much.

Under the revised terms, Mitsubishi will acquire a 21% ownership stake of Morgan Stanley in exchange for $9 billion, with the majority of that investment coming in the form of both convertible and non-convertible preferred stock both of which pays Mitsubishi a 10% dividend.

Some experts said that reported behind-the-scenes involvement by U.S. government officials may have played an important role in keeping the original terms of the deal intact.

U.S. government officials allegedly intervened in the weekend talks, offering assurances to the Tokyo-based bank about its investment. There were fears that a decision by Mitsubishi to walk away would not only put Morgan Stanley at risk of failure but aggravate the already anxious mood in financial markets.

"There is an interest larger than both entities in creating some sense of calm," said Douglas Ciocca, a managing director at the Leawood, Kansas-based Renaissance Financial Corp., which manages over $1.6 billion.

In recent weeks, some of Wall Street's biggest players have virtually vanished as a result of fear in the market. In mid-September, Lehman Brothers filed for bankruptcy and Merrill Lynch (MER, Fortune 500) sold itself to Bank of America (BAC, Fortune 500).

Morgan Stanley and rival Goldman Sachs (GS, Fortune 500) were already forced to reevaluate their way of doing business amid the market turmoil, asking the Federal Reserve last month to be reclassified as bank holding companies.

The Fed agreed to the request, which means the two firms are allowed to create commercial banking operations that can take deposits.

Citing an internal memo to employees, the Wall Street Journal reported that John Mack, Morgan Stanley's chairman and CEO, was looking to build up the company's deposit base through acquisitions with the capital from the Mitsubishi deal.

Either way, the $9 billion investment is considered to be a life-saving deal for Morgan Stanley and will arguably broaden the reach of both firms domestically and overseas.

"Today's investment further bolsters our strong capital position and, together with our strategic alliance, will accelerate our transition under our new bank holding company structure and help us realize opportunities created by the continuing dislocation in the financial markets," John Mack, Morgan Stanley's chairman and CEO said in a statement. To top of page

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