Morgan Stanley’s shares lead new rout in financials

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They’re back to beating up on one of the last major investment banks still standing: Shares of Morgan Stanley are down sharply today on rumors that its deal for a capital injection by Japan’s Mitsubishi UFJ Financial was falling apart.

The stock fell as low as $14.13 from Monday’s close of $23.50, and was trading at $17.55 at around 12:30 p.m. PDT. The rumors are helping to drag down financial stocks in general, and the broader market.

The Dow Jones industrials were off 306 points, or 3.1%, to 9,649.

Morgan Stanley denied that the planned $9-billion capital infusion from Mitsubishi was in trouble. ‘The deal is proceeding on track,’ Mark Lake, a spokesman for Morgan, told Bloomberg News.

After Lehman Bros. collapsed in mid-September when its access to short-term credit was cut off by the market, traders focused on Morgan Stanley and Goldman Sachs Group as the next potential victims of the worsening credit crunch.

Morgan’s shares fell from $37.23 on Sept. 12 to $21.75 on Sept. 17. The plunge in the stock was one of the catalysts for the Securities and Exchange Commission’s surprise announcement on Sept. 19 that it would temporarily ban all ‘short selling’ of 800 financial stocks.

That shorting ban expires at midnight on Wednesday. Given the damage the market is doing to Morgan’s stock without the help of short sellers, the company can’t be looking forward to the start of trading on Thursday.