Morgan Stanley stock tumbled yesterday on a rumour that Mitsubishi UFJ Financial Group would withdraw from an agreement to buy nearly a quarter of the investment bank.

The US bank, however, said the deal is scheduled to close on time once a mandatory regulatory waiting period expires at the end of the week.

Morgan Stanley dropped $US5.85, or 25%, to $US17.65 in New York trading after falling as low as $US14.13 earlier in the day

On Monday, the Federal Reserve Board approved the purchase that would allow Mitsubishi, Japan's largest bank, to buy up to a 24.9% stake in Morgan Stanley.

Once the deal was approved, a five-day waiting period must be completed before the transaction can close.

"The deal is proceeding on track'' and will close as soon as this weekend, said Mark Lake, a spokesman for Morgan Stanley. "The deal is expected to close imminently upon expiration of the Federal Reserve's five-day post-approval waiting period.''

"There's a rumour Mitsubishi may pull out,'' Fred Froewiss, vice-president of institutional sales at RF Lafferty & Co in New York, said yesterday. "Maybe they're getting cold feet because of the freeze in the credit markets. The market is really trading on whispers and fear.''

Asset sales

Morgan Stanley, which last month opted to convert itself into the fifth-largest US bank holding company, also said yesterday that it cut assets on its balance sheet 9% to $US900 billion from $US987 billion on August 31.

The decline in assets and the increase in equity will reduce Morgan Stanley's leverage, a measure of how much it depends on borrowed money.

Based on Morgan Stanley's asset levels on August 31, the Mitsubishi investment would cut Morgan Stanley's ratio of assets- to-equity, or leverage, to less than 20 to 1, the firm said today. The company's Tier 1 capital ratio, which measures assets on a risk-adjusted basis, will be more than 15.5%, or more than double the 6% required by the Federal Reserve.

"There's a lack of confidence in the entire financial system right now, and the firms in the spotlight are the ones that are the most levered,'' said Anton Schutz, president of Mendon Capital Advisors.

Small fry

Last month, Morgan Stanley, along with Goldman Sachs Group Inc received approval to convert to bank holding companies. The pair were the last stand-alone investment banks left after Lehman Brothers filed for bankruptcy protection and Merrill Lynch was sold to Bank of America.

The changes occurred within days of each other as investors worried about the credit crisis sapping liquidity from investment banks.

Morgan Stanley and Goldman Sachs bought some time by applying to become commercial banks, said Christopher Whalen, managing director of Institutional Risk Analytics, but that "changing charters isn't sufficient for survival.''

"The problem Morgan and Goldman have is that they're not big enough,'' Whalen said. "In today's world, Morgan Stanley and Goldman Sachs are teeny. They're little guys. People are going to say why do business with them, I'll do business with Bank of America. It's a very cruel discrimination process that operates in the markets today.''

AP, Bloomberg