Morgan renegotiating bank deal

Morgan Stanley is engaged in high-stakes talks with a big Japanese bank over a multi-billion capital investment in the embattled Wall Street bank, according to an online report Sunday.

Morgan and Mitsubishi UFJ Financial Group were renegotiating the terms of a proposed $9 billion stock purchase, the New York Times reported, citing sources.

According to the Times, Mitsubishi wanted better terms since Morgan's market value has plummeted. Under the new terms, Mitsubishi would still buy 21% of Morgan but in the form of preferred shares that pay a 10% annual dividend. Both firms have been in contact with officials of both governments.

The U.S. Treasury Department, as part of its response to the growing financial crisis, is poised to start implementing a $700 billion bailout plan that may involve direct equity investments in banks. Treasury is not planning on making such an investment in Morgan, according to the Times.

Both firms denied comment to the Times.

Last week, Morgan denied rumors that the deal was falling apart because of a dramatic drop in its stock price as investors grew wary of the firm's prospects. Mitsubishi's $9 billion investment is considered to be a life-saving deal for Morgan Stanley.

Shares of Morgan (MS, Fortune 500) plummeted 22% on Friday on news that rating agency Moody's was weighing a potential downgrade of the long-term debt ratings of the company and its subsidiaries. At one point, shares fell as much as 46%.

Still, despite several reassurances from Morgan Stanley and Mitsubishi that the deal would close as scheduled next week, investors remained jittery about Morgan's fate.

Morgan Stanley and its Wall Street rival Goldman Sachs (GS, Fortune 500) have both been hit hard in the past month or so. The credit crisis already has led to the bankruptcy of Lehman Brothers as well as the sale of another prominent investment bank, Merrill Lynch (MER, Fortune 500), to Bank of America (BAC, Fortune 500). In the wake of the market meltdown, both Morgan and Goldman asked 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. This move should help Morgan and Goldman raise more capital.