Opinion

The Great Debate

This time, CIC raises Morgan Stanley stake

June 3, 2009

Wei Gu– Wei Gu is a Reuters columnist. The opinions expressed are her own –

America may have fallen out of love with Wall Street, but China hasn’t. That’s one way to read CIC’s just-announced $1.2 billion investment in Morgan Stanley — funds that allow the investment bank to repay Tarp money to the U.S. Treasury.

This looks to be an aggressive vote of confidence in the beating heart of U.S. financial capitalism.

Up to a point, but it is also a defensive move.

The truth is that CIC is kicking itself after turning up a chance last autumn to become Morgan’s main shareholder at a rock bottom price, letting in Japan’s Mitsubishi UFJ which bought a big stake at prices which now look sensible.

CIC is not in such a happy position. It bought $5.6 billion of Morgan Stanley convertible securities with a conversion price of $48 to $57 in 2007. When Morgan Stanley’s shares slumped to only a quarter of that price last September, the then beaten-down bank asked CIC to plough in more money.

Facing a big backlash at home for big paper losses on its investment in private equity firm Blackstone and also the Morgan Stanley stake, CIC demurred.

Acting as a sort of rainmaker, former U.S. Treasury Secretary Henry Paulson called up a top Chinese official, promising that Morgan Stanley would not be allowed to fail, according to people who are familiar with the matter.

By asking the Chinese to raise its stake beyond 10 percent, he essentially offered to waive the rule that would have required the Chinese group to be regulated in the U.S. were it to own more than 10 percent of a financial firm.

While that was tempting for CIC, fear still won out over greed and the Chinese resisted Paulson’s entreaties.

That left the field clear for Mitsubishi UFJ, to step in. It paid $9 billion for a 21 percent stake through a mixture of common stock (purchased at $25.35 a share) and convertible preferred shares, with a conversion price of just over $30 per share, roughly half what CIC paid a year ago.

The deal also diluted CIC’s stake to about 7.7 percent. Morgan Stanley’s shares have since risen. Mitsubishi has used its stake to carve out commercial ventures with the U.S. bank.

CIC’s fresh investment at least allows it to reverse last autumn’s humiliating dilution, although Mitsubishi has resisted being diluted, maintaining its stake at the 21 percent level.

But it is not clear it does much more for CIC than that. True the deal allows them to average down their in-cost. But it may simply confirm their reputation as a sort of reverse-Buffett, buying only when the market is greedy and sitting things out when it is fearful.

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