If nothing else, this should put to rest some of the paranoia about the Goldmanization of Treasury.

Goldman Sachs and Morgan Stanley have each thought itself to be the elite of Wall Street—while there was a Wall Street. When Hank Paulson was at Goldman Sachs and John Mack was at Morgan Stanley and then at Credit Suisse First Boston, they were fierce rivals.

But now the Paulson Treasury Department has come to the aid of Morgan Stanley, reports Andrew Ross Sorkin of the New York Times. Treasury officials offered protection to Japanese bank behemoth Mitsubishi UFJ if it went ahead with its planned $9 billion investment in Morgan Stanley.

That seemed to do the trick.

The two companies announced today a revised deal for Mitsubishi to take a 21 percent stake in Morgan Stanley. Under the revised terms, the Japanese bank has acquired $7.8 billion of perpetual noncumulative convertible preferred stock with a 10 percent dividend and a conversion price of $25.25 per share, and $1.2 billion of perpetual noncumulative nonconvertible preferred stock with a 10 percent dividend.

Half of the convertible preferred automatically converts after one year into common shares when Morgan Stanley's stock trades above 150 percent of the conversion price for a certain period, and the other half converts on the same basis after year two. The nonconvertible preferred stock is callable after year three at 110 percent of the purchase price.

"We are honored to welcome Mitsubishi UFJ, a global leader in commercial banking, as a long-term investor and strategic partner of Morgan Stanley," Mack said in a statement.

Last week, doubts about the deal—and Morgan Stanley's ability to survive—hammered shares of the firm and pushed up sharply the costs of credit-default swaps on its debt. The stock closed at $9.68 on Friday. Today, shares of Morgan Stanley are poised to soar.

Mitsubishi agreed on September 29 to buy $6 billion of convertible preferred shares of Morgan Stanley and $3 billion of common shares at $25.25 per share.

Several reports indicate that the revised deal will involve only $9 billion worth of convertible preferred. That is an investment that Treasury will now guarantee.

After the collapse of Lehman Brothers sent violent shock waves throughout the world's financial markets, it is clear that Washington wants to do everything to avoid a repeat.

As Rob Cox said on Breakingviews.com on Friday: "The question immediately before policymakers—particularly President Bush and Treasury Secretary Hank Paulson—is whether the lesson it might teach in letting another firm go outweighs the harm it would inflict on the economy and the credit system on which it depends. The answer is surely no."