Japan’s biggest bank agreed last night to pour $9 billion (£5 billion) of capital into Morgan Stanley in a deal hammered out during a series of last-minute negotiations.

The announcement of the purchase by Mitsubishi UFJ Financial Group (MUFG) unleashed a wave of relief on Wall Street and an immediate 28 per cent surge in Morgan Stanley’s shares. By the end of the day, the stock was up $8.24, more than 85 per cent, at $17.92.

But Fitch Ratings last night cut its long-term issuer default rating on Morgan Stanley by two notches to“A”. It also downgraded the long-term senior debt to“A” and the subordinated debt to “A-minus”. Fitch said that it expects the stresses on the bank’s core business to continue for some time despite the additional capital injection.

Rumours that MUFG might pull out of its cash-supplying agreement had played a central role in the unprecedented savaging of the embattled Wall Street investment bank’s shares last week.

The deal was being scrutinised by markets worldwide as a possible template for the way in which Washington and the private sector might cooperate to rescue the banking sector. Sources close to the Japanese bank told The Times that MUFG had overcome its doubts because of the “implicit support and guarantee” of the US Government.

The capital injection appeared to have been sealed in late September, but needed to be sweetened after last week’s stock market bloodbath and a 58 per cent nosedive in Morgan Stanley’s value. Had MUFG proceeded under the original terms, it would have made an immediate paper loss of about $1.5 billion on the common stock portion of its new investment.

Under the new terms, MUFG’s billions will continue to buy only a 21 per cent stake in Morgan Stanley and the Japanese negotiators remain content to put only one of their people on its board. To avoid both immediate paper losses on the deal and the fury of its investors, MUFG will buy only convertible preferred stock that pays a 10 per cent dividend. The majority of the preferred stock, $7.8 billion of it, will convert at $25.25 per share – not the $31.25 originally settled on. The remainder will not be convertible.

Despite persistent doubts among Tokyo analysts that the deal was right for MUFG, the Japanese bank has gained a much-cherished foothold in Wall Street and is expected to seek numerous business tie-ups with Morgan Stanley through its new stake. It has also restored its standing in America, where authorities lifted a restriction on the Japanese bank’s application for holding company status.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts