Morgan seals deal with Mitsubishi

Recently minted commercial bank Goldman Sachs Inc. has applied for a New York state banking charter, state officials said Monday.

Governor David Patterson praised the decision, calling Goldman Sachs the "bedrock" of New York's financial community and that it reflects the state's ability to "effectively regulate" banks.

"We look forward to working with [Goldman Sachs] as they transition a substantial portion of their business from an investment bank to a new regulatory scheme," Patterson said in a statement.

Goldman Sachs (GS, Fortune 500) and fellow brokerage Morgan Stanley (MS, Fortune 500) were the last remaining investment banks on Wall Street before federal officials granted the firms' requests to become bank holding companies last month.

The decision to become commercial banks came as rival brokerages Bear Stearns and Lehman Brother collapsed in the fallout of the nation's credit crisis.

As commercial banks, Goldman and Morgan have the ability to purchaMorgan 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. se other retail banks, which could give them a more steady foundation of cash. It also gives them access to loans from the Federal Reserve that were not available to brokerages.

But it also puts Goldman and Morgan under the Fed's supervision, increasing the agency's regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.

A call to Goldman Sachs requesting comment was not immediately returned Monday.

The decision to apply for a New York state charter will not preclude Goldman from expanding its business or opening branches outside of the state, according to Bert Ely, principal of Ely & Co., a financial institutions and monetary policy consulting firm in Virginia.

"Banks can have multiple charters," Ely said. Having a New York charter "does not bar them from having other charters," he added.