Sept. 30 (Bloomberg) -- Mitsubishi UFJ Financial Group Inc. took a $506 million paper loss on its $9 billion investment in Morgan Stanley yesterday after the rejection of the U.S. financial rescue plan sent banking stocks tumbling.

As part of the deal, the Tokyo-based lender agreed to buy $3 billion of Morgan Stanley's common stock for $25.25 a share. The second-largest U.S. securities firm plummeted 15 percent in New York Stock Exchange composite trading to close at $20.99.

The loss underscores the risks involved for Asian companies seeking bargains in the wreckage on Wall Street. Morgan Stanley, Citigroup Inc. and Merrill Lynch & Co. have tapped the region's banks and sovereign wealth funds for money in the past year as falling U.S. home prices triggered the worst financial crisis since the Great Depression.

``It's increasingly difficult to know what's going to happen,'' said Naoteru Teraoka, who helps oversee $21 billion at Chuo Mitsui Asset Management Co. in Tokyo. ``The U.S. bailout plan was the big change we hadn't had before, but that's gone now, so things can only get worse.''

Mitsubishi UFJ, Japan's biggest bank, slumped 7 percent at 11 a.m. in Tokyo trading, following Asian financial stocks lower after the House of Representatives voted down the $700 billion measure aimed at stemming the financial crisis.

As part of the deal, Mitsubishi UFJ will also buy $6 billion of convertible preferred stock that pays a 10 percent dividend, the two companies said yesterday in a statement.

Goldman Fundraising

Takashi Takeuchi, a Tokyo-based spokesman at Mitsubishi UFJ, declined to comment on whether the agreement with Morgan Stanley provides room for renegotiating terms if the U.S. firm's shares fall.

The deal is subject to conditions including regulatory approvals, Mitsubishi UFJ and Morgan Stanley said in a statement.

Western investors have also gotten burned. Goldman Sachs Group Inc. sold $5 billion of common stock to the public last week for $123 apiece, only to see its stock tumble to $120.70 yesterday. Billionaire Warren Buffett bought another $5 billion of preferred shares with a 10 percent dividend.

A $1.3 billion investment in Washington Mutual Inc. by David Bonderman's private-equity fund TPG Inc. evaporated last week when WaMu was seized by federal regulators. A fund managed by J.C. Flowers & Co. saw its 24.9 percent stake in Germany's Hypo Real Estate Holding AG drop from $1.77 billion to $253.8 million after the German government gave Hypo a $50 billion loan guarantee to keep it from collapsing.

``If it had waited just a bit longer, Mitsubishi UFJ could have bought Morgan for a much lower price,'' said Mitsushige Akino, who oversees the equivalent of $468 million at Ichiyoshi Investment Management Co. in Tokyo.

`Fire-sale Mode'

Mitsubishi UFJ, with about $1.3 billion in credit-market losses and writedowns since last year compared with $15.7 billion at Morgan Stanley, also said it plans to tap the U.S. firm's expertise in corporate and investment banking to expand abroad. Almost three-quarters of Mitsubishi UFJ's profit last fiscal year came from Japan, according to data compiled by Bloomberg.

The financial mayhem that has crippled banks and securities firms in the U.S. and Europe has played into the hands of Asian companies. The region has accounted for just $24.3 billion of the total $591 billion in writedowns and credit losses announced worldwide so far.

Nomura Holdings Inc., Japan's biggest brokerage, agreed this month to buy the Asian, European and Middle Eastern operations of Lehman Brothers Holdings Inc. for less than a month's revenue after the fourth-largest U.S. securities firm filed for bankruptcy.

``Once the first couple of deals get done, you'll see greater interest from the other Asian players,'' said Greg Bundy, executive chairman of merger advisory firm InterFinancial Ltd. in Sydney and a former head of Merrill's Australian unit. ``America is in fire-sale mode right now. We'll see competitive forces in Asia go to work pretty quickly.''

Lazard Freres & Co., a unit of Lazard Ltd., provided financial advice to Mitsubishi UFJ. BlackRock Inc. advised Mitsubishi UFJ on asset valuations.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

Last Updated: September 29, 2008 22:22 EDT