Japan May Want to Buy Gold, Not Morgan Stanley: William Pesek
Oct. 13 (Bloomberg) -- None more so than the folks at Mitsubishi UFJ
Financial Group Inc., who are about to sink $9 billion into Morgan
Stanley. That move seemed brilliant when it was announced last month.
Today, it looks a bit troublesome as shares in the fifth-biggest U.S.
bank-holding company drop.
Moody's Investors Service said Oct. 10 that Morgan Stanley's credit
rating may be cut as the global market slump threatens profits. Chief
Executive Officer John Mack last week dismissed rumors Mitsubishi UFJ
was having second thoughts. According to reports today, the banks are
discussing altering the terms of the deal.
Should Mitsubishi UFJ pull out? One really has to wonder.
Given the way markets are cascading lower and global recession risks
are growing, Japan's biggest bank is almost better off speculating in
companies that produce scotch, canvas tents and canned soup. And then
there's gold, which will surge further as the dollar's value dwindles.
Mitsubishi UFJ sees Morgan Stanley as a long-term investment, a chance
to grab a piece of a fabled Wall Street giant humbled by market
turmoil. And relative to U.S. peers, Japan's banks are solid, having
spent the 2000s writing down bad loans and avoiding risky,
Wouldn't it be a shock if after years of conservatism, a major
Japanese bank lost big on a renewed foray overseas?
Much has been made of how Japanese companies are increasing foreign
acquisitions, using their cash-hoards to grab assets beaten down by
the credit crisis and unfolding economic slowdown.
Takeovers by companies including Nomura Holdings Inc., TDK Corp.,
Daiichi Sankyo Co. and, potentially, Mitsubishi UFJ put Japan on
course for its biggest buying spree since the 1980s bubble. Back then,
Japanese buyers overpaid in a huge way for assets such as New York's
Rockefeller Center and California's Pebble Beach Golf Links.
The key for Mitsubishi UFJ CEO Nobuo Kuroyanagi is to heed the lessons
of Japan's bubble years. Complicating things is how difficult it is to
value assets -- and, by extension, a company's worth -- in this market
Take Korea Development Bank's ill-fated flirtation with Lehman
Brothers Holdings Inc. The South Korean bank offered $6.40 a share for
a controlling stake in Lehman in the weeks preceding the U.S. firm's
bankruptcy last month. Lehman CEO Richard Fuld wanted more.
The unraveling of the deal left the Korean bank looking quite savvy
given what we later found out about Lehman's health. It displayed the
real power of savings-rich Asia as U.S. companies bleed capital.
The saga also may get Fuld into hot water. On Oct. 7, U.S. lawmakers
grilled him about a Sept. 10 conference call in which he said Lehman's
capital reserves were adequate. Representative John Mica, a Florida
Republican, asked whether Fuld knew then that Lehman wasn't getting an
investment of $3 billion to $5 billion from Korea Development Bank.
Fuld said: ``There certainly was no intent to mislead.''
Betting on Morgan Stanley is an even bigger roll of the dice for
Mitsubishi UFJ. On one level, Morgan Stanley would seem as good as any
U.S. financial company in which to grab a 21 percent stake. On
another, who really knows these days?
In its statement, Moody's hardly suggested the firm is a basket case.
``Morgan Stanley's recent performance has been relatively solid, it
has acted to solidify its capital base, it has maintained a good
liquidity profile, and it has benefited from a level of systemic
support that is factored into the rating,'' Moody's said.
For Mitsubishi UFJ, the risk is quite different from Nomura's purchase
of Lehman's Asia-Pacific business. Nomura bought the carcass of a
bankrupt company without taking on a potentially risky balance sheet.
Mitsubishi UFJ risks buying into a terminally ill patient.
The point isn't to pick on Morgan Stanley. Yet one is hard- pressed to
rule out a bad ending for the gamut of financial institutions amid
Consider the experience of sovereign wealth funds. How happy can China
be with its multibillion- dollar investments in Blackstone Group LP and
Morgan Stanley. Ditto for Singapore, which invested in Merrill Lynch & Co.
It's impossible to know what Mitsubishi UFJ will do. If it sticks to
Plan A, the Morgan Stanley deal could be closed as soon as tomorrow,
when the Federal Reserve-imposed waiting period expires. Or Mitsubishi
UFJ may renege, concluding it risks throwing good money after bad as
Weighing the interests of shareholders won't be easy. If markets
rebound soon, Mitsubishi UFJ stockholders will cheer the deal. If
Morgan Stanley goes the way of Lehman or Bear Stearns Cos., investors
will be livid.
Whatever Mitsubishi UFJ decides, one thing is clear: The risk of
buyer's remorse has never been bigger in a global system that has
never been so shaky.