Morgan Stanley (MS) has its partner. The New York-based brokerage firm-turned-bank said Monday morning it signed a nonbinding letter of intent to sell as much as 20% of itself to Mitsubishi UFJ Financial Group. Terms weren’t disclosed, and the price is to be “based on Morgan Stanley’s book value as agreed upon completion of satisfactory due diligence,” Morgan Stanley said.

The news comes after a week in which shares of Morgan Stanley plunged as low as $12 a share before recovering on the news that the government was preparing a series of moves in support of ailing financial firms. The plans include a big taxpayer-funded purchase of problem mortgage assets and a crackdown on the short-selling of shares in nearly 800 financial companies. On Sunday night, Morgan Stanley and rival Goldman Sachs (GS) agreed to be regulated by the nation’s top banking regulator, the Federal Reserve, in a move that will make them banks and presumably subject them to stricter oversight.

The Mitsubishi UFJ tie-up will offer several advantages as Morgan restructures, the firm says.

“This strategic alliance with Mitsubishi UFJ can put Morgan Stanley in an even stronger position as we look to realize the opportunities we see in the rapidly changing financial marketplace,” CEO John Mack said Monday. “As one of the largest commercial banks in the world, Mitsubishi UFJ would be a valuable partner as we transition to a bank holding company and build our bank services and deposit base.”

Meanwhile, the Mitsubishi deal may spell the end of talks between Morgan Stanley and a widely reported possible suitor, Charlotte, N.C.-based Wachovia (WB). While Morgan Stanley shares rose 13% to $30 and change in early trading Monday, Wachovia dropped 9%.

By Katie Benner

Goldman Sachs (GS) has kept its hands clean the credit crisis, but now the firm may have to wallow in the mud with the rest of its peers. The Wall Street Journal reports that some pointed questions are being asked of Goldman chief executive Lloyd Blankfien by none other than Alan Schwartz, who was at the helm of Bear Stearns when it died in March. Schwartz would like to know whether there is any truth to talk that in the days preceding Bear’s fall, Goldman traders in London were manipulating the struggling firm’s stock.

If this story sounds familiar, it’s probably because this isn’t the first time that Goldman employees have been accused of making money on a dying company. Back in 1998, the firm’s traders were accused of hammering positions taken by hedge fund Long Term Capital Management as it went belly up. According to the Journal, Blankfein was shocked by the inquiry from Schwartz, and that he told the former Bear Stearns chief that he would crack down on any Goldman traders who engaged in manipulative activity. A Goldman spokesman told the paper that Blankfein does not recall this conversation with Schwartz and strongly denies wrongdoing.

Lehman Bros. (LEH) CEO Dick Fuld piled on too. “You’re not going to like this conversation,” Fuld told Blankfein, according to the Journal. Fuld was reportedly hearing “a lot of noise” about Goldman traders allegedly spreading negative rumors about Lehman, whose stock has been dropping like a stone. Fuld has reportedly spent the last few months contacting traders he thinks may have been bad-mouthing Lehman.

According to trading documents reviewed by the Journal, in the weeks before March 16, when Bear Stearns reached its initial agreement to sell itself to JPMorgan Chase (JPM), Goldman Sachs was one of the most active parties in trading securities known as credit default swaps that it had bought from or sold to Bear Stearns — more than most other Bear trading partners. A Goldman spokesman told the newspaper that it would be unwise “to make assumptions about this information without understanding the underlying transactions.”

The Securities and Exchange Commission is looking into whether brokers and hedge funds have deliberately spread rumors to manipulate markets — particularly during Bear Stearns’ fall – and vows to take action to limit short-selling in certain stocks, including Fannie Mae (FNM) and Freddie Mac (FRE).

by Katie Benner

Investor Jim Rogers tells Bloomberg that the Treasury Department’s plan to shore up market confidence in Fannie Mae (FNM) and Freddie Mac (FRE) is an “unmitigated disaster” and that the country’s largest mortgage lenders are “basically insolvent.” “These companies were going to go bankrupt if they [the government] hadn’t stepped in to do something, and they should’ve gone bankrupt with all of the mistakes they’ve made,” Rogers reportedly said.

Rogers is a former partner of famed hedge fund manager George Soros and the current chairman of Rogers Holdings. He said that taxpayers will be saddled with debt if Congress approves Treasury Secretary Henry Paulson’s request for the authority to buy unlimited stakes in and lend to Fannie and Freddie; and that the mortgage giants’ stocks could fall further. Goldman Sachs (GS) analyst Daniel Zimmerman agrees, saying shares could slide another 35%. He lowered his price estimate for Fannie to $7 from $18 and for Freddie to $5 from $17. The analyst note isn’t surprising, given the government’s reported indifference to the fortunes of company shareholders. Fannie Mae’s market cap is now about $9.5 billion, down from $38.9 billion at the end of 2007. Freddie Mac’s market value has shrunk to about $4.4 billion from $22 billion at the end of last year.

Soros got a jab in, too. The billionaire investor told Reuters that “Freddie Mac and Fannie Mae have a solvency crisis, not a liquidity crisis.” The real problem, he says, is that Fannie and Freddie are “extremely leveraged,” and that “deterioration in the housing market, the foreclosures, are going to cause losses which exceed their equity.”

Goldman Sachs (GS) shares were flat in early trading Tuesday, as investors digested news of the big brokerage firm’s latest coup on the earnings front. Goldman made $2.09 billion, or $4.58 a share, for the second quarter ended May 30, which is down from $2.29 billion, or $4.93 a share, a year ago, but more than a dollar a share ahead of the Thomson Financial analyst consensus estimate. Goldman’s upside surprise Tuesday marks its 10th straight quarter beating analysts’ estimates, according to numbers compiled by Bespoke Investment Group, though the investment advisory firm notes on its Web site that earnings beats haven’t always translated into same-day stock market gains.

Goldman’s latest upside surprise is nonetheless remarkable, given the credit crunch pain being felt in recent weeks at rival Lehman Brothers (LEH), which yesterday posted a $2.8 billion second-quarter loss. In one respect, though, Lehman and Goldman are similar: Both reported latest-quarter losses on their efforts to hedge against declining values in fixed income markets. For Goldman, fixed income, commodity and currency revenue slumped 29% from a year ago in the latest quarter to $2.38 billion, as the firm’s credit products business posted a $775 million loss - including a $500 million hedging loss - on non-investment-grade credit origination activities. That setback, minor as it is in a quarter as robust as Goldman’s latest one is, says Lehman isn’t the only firm having its problems when it comes to risk management.

Investment banks Goldman Sachs (GS), Merrill Lynch (MER) and Lehman Brothers (LEH) fell in early trading Thursday after analyst Dick Bove at Ladenburg Thalmann cut his ratings on the stocks to sell, citing continuing risk management problems and weakening earnings power.

Bove, who was an analyst at Punk Ziegel before Ladenburg bought the company this spring, said he believes shares of all three companies could fall 15%-20% from current levels. He points to the surge of energy prices and the decline of the dollar as symptoms of an inflation that is eroding the value of the companies’ assets. Bove, who turned bearish on brokerage firms last summer before the credit crunch was fully felt, also said Goldman, Lehman and Merrill have made bad bets against financial indexes in the current quarter. He said he believes they have lost $5 billion to $7 billion on those failed hedges, with Lehman taking the worst hits.

But if Lehman is viewed as the riskiest play, Bove tells Bloomberg television that investors may be underestimating the damage that could occur at Goldman. The firm, he says, “cannot miss what’s going on in the markets,” no matter how savvy it appears to be. “What’s going on in the markets is quite negative,” Bove says.

Will the slowing economy and nervous stock markets tarnish even mighty Goldman Sachs (GS)? Oppenheimer analyst Meredith Whitney thinks so. Whitney, who was among the first analysts to question Citi’s (C) financial straits last fall, downgraded Goldman stock to perform from outperform Tuesday, citing the 40% premium Goldman shares trade at compared with peers such as Lehman Brothers (LEH) and Merrill Lynch (MER). Whitney says she expects the stock-market gap between Goldman, which managed to make money even on the collapse of the mortgage-backed securities market, and its rivals to narrow as economic conditions sour. “Goldman’s franchise remains well ahead of its peers with respect to market share but most importantly execution, and none of that has changed, in our opinion,” she writes. “We simply believe there is more probability of multiple contraction than multiple expansion in the current environment of weak/low margin capital market conditions.” That’s part of why Goldman shares, down 3%, are joining in Tuesday morning’s selloff in financial stocks.