Morgan Stanley seen $1.8 billion short, to issue stock

By Joseph A. Giannone

NEW YORK (Reuters) - Morgan Stanley said on Thursday it would sell $5 billion in common stock and bonds not backed by the FDIC after the U.S. government stress test determined the investment bank needed to boost capital by $1.8 billion.

The investment bank said it had commenced a public offering for $2 billion of common shares.

It also said it intended to sell $3 billion of senior notes that would not be guaranteed by the U.S. Federal Deposit Insurance Corp (FDIC).

The announcement came as the government announced results of how much more capital the 19 largest U.S. banks need to survive a severe financial downturn.

Morgan Stanley shares fell 4.8 percent to $27.14 in the regular session of the New York Stock Exchange on Thursday, and another 6 percent in after-hours trading.

Before this decline, the stock had soared 77 percent this year on rising optimism that the worst was behind the bank.

Earlier on Thursday, people familiar with the situation told Reuters that Morgan Stanley had been told to boost capital by about $1.5 billion. The increase, these people said, was in connection with the bank's pending deal to take control of Citigroup's Smith Barney brokerage unit.

That is a modest amount compared with the $34 billion increase reportedly mandated for Bank of America Corp, the largest U.S. bank by assets.