Aug. 6 (Bloomberg) -- Morgan Stanley, the sixth-biggest U.S. bank by assets, agreed to pay $950 million to redeem warrants that the U.S. Treasury received in October when it bought $10 billion of preferred stock in the firm.

The price compares with $1.1 billion paid by Goldman Sachs Group Inc., Morgan Stanley’s larger rival, to redeem warrants on July 22. Both New York-based firms repaid $10 billion plus dividends to the U.S. Treasury in June, freeing them of restrictions on paying year-end bonuses to employees.

Morgan Stanley’s payment was less than the $1.2 billion that Linus Wilson, a finance professor at the University of Louisiana at Lafayette, estimated the warrants were worth. By contrast, Goldman Sachs agreed to pay the amount requested by the Treasury a week after reporting record profits and setting aside $11.4 billion to pay employees in the first half.

“They didn’t pay full price like Goldman did,” Wilson said. “Morgan Stanley was definitely in a better bargaining position than Goldman Sachs just because of the political heat that Goldman faces.”

Wilson said Morgan Stanley could have lowered its payment by issuing about $3.1 billion in new stock, which would have triggered a provision letting the firm cancel half the warrants. Morgan Stanley would have had to sell a total of $10 billion of stock. The firm has so far sold $6.9 billion this year.

“If you don’t take into account the cancellation provisions in the agreements, the deal doesn’t look that great” for taxpayers, Wilson said. “But if you do take into account the cancellation provisions then it looks like a good deal.”

In total, Morgan Stanley paid the government $1.27 billion in dividends and to redeem the warrants, the company said today.

U.S. Rescue Aid

Like Goldman Sachs, Morgan Stanley was among the first nine banks to receive capital from then-Treasury Secretary Henry Paulson as the government tried to stabilize the financial system. Goldman Sachs and Morgan Stanley were the two biggest U.S. securities firms before converting to banks in September, a step that provided them with financial support from the Federal Reserve.

“Morgan Stanley is pleased to be repurchasing this warrant and providing U.S. taxpayers a 20 percent annualized return on their investment in our company,” Morgan Stanley Chief Executive Officer John Mack said in a statement today. “We appreciate the critical role that the U.S. government played last fall in helping stabilize the banking industry and financial markets at a moment of unprecedented crisis.”

Morgan Stanley on July 22 reported a second-quarter loss from continuing operations that was wider than analysts expected as trading revenue fell and costs for compensation rose.

In the Oct. 28 agreement, the Treasury gained a 10-year warrant containing the right, but not the obligation, to buy as many as 65.25 million shares of Morgan Stanley at an exercise price of $22.99 per share, according to a regulatory filing last year. Morgan Stanley’s closing share price on Oct. 28 was $15.20. The shares fell 16 cents to $30.89 at 10:21 a.m. in New York trading.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: August 6, 2009 10:22 EDT