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Pricing deals in current markets is like playing Russian roulette. Mitsubishi UFJ Financial Group knows this to its cost. Two weeks ago, Japan’s biggest bank by assets agreed to pay $9bn for a 21 per cent stake in Morgan Stanley. On Friday, that would have been almost enough to buy the entire US investment bank (excluding a control premium). Understandably, MUFG on Monday reworked the terms.

The original deal saw MUFG buying $6bn of preferred Morgan Stanley stock and $3bn of common shares. Now MUFG will plough $7.8bn into preferred stock, which will convert into common stock at $25.25. This is lower than the $31.25 initially agreed but well ahead of Friday’s $14.22 share price. The residual $1.2bn will, meanwhile, take the form of perpetual non-converting preference stock; in essence a permanent loan.

This seems like a fair compromise. MUFG gets more interest income from its Wall Street prize for the same money thanks to the prefs’ 10 per cent yield. In the meantime, Morgan Stanley gets capital without a wholesale takeover by the Japanese.

But it has risks. First, the recast deal reportedly required a US government pledge that any equity injection it might subsequently make would not wipe out MUFG’s investment. That, after all, was the fate of investors who bought preference shares in Fannie Mae and Freddie Mac this year. For its part, Morgan Stanley will have to cough up more in higher dividends.

MUFG has also imported a whole lot of volatility. Sure, Morgan Stanley dividends will be equivalent to almost a 10th of MUFG’s earnings last year. But this remains a portfolio investment and Japanese banks know how fickle such things are. The country’s six biggest banking groups boasted unrealised gains on their equity portfolios of more than $50bn in June but, as Barclays Capital calculates, tanking markets have turned that into a small loss. MUFG’s Morgan Stanley investment adds further volatility to this mix.

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