Mitsubishi Deal Aids Morgan Stanley’s Recovery

James P. Gorman, the chief executive of Morgan Stanley, received some bad news earlier this year. A joint venture controlled by Mitsubishi UFJ Financial in Japan was facing huge losses, which would drag down earnings at the American investment bank.

But Mr. Gorman used the situation as leverage, striking a deal that frees Morgan Stanley from paying roughly $800 million a year to Mitsubishi, the costly overhang of a cash infusion made during the financial crisis.

Announced on Thursday, the agreement between the two banks removes a major financial burden on Morgan Stanley, which at the same time reported that first-quarter profit declined 48 percent from the period in the previous year. It also was a personal victory for Mr. Gorman, who has struggled to turn around Morgan Stanley since becoming chief executive in January 2010. In an internal note to employees, Mr. Gorman, 52, called the deal a “signature event” for the firm.

Under the terms of the transaction, Mitsubishi will trade most of its convertible preferred stock in Morgan Stanley for common stock. Once completed, Mitsubishi UFJ will own 385 million common shares, or roughly 10 percent of the company. The agreement requires approval from shareholders and regulators.

Although the firm still faces major obstacles in its recovery, investors welcomed the deal. Shares of Morgan Stanley closed at $26.48, up 1.69 percent, on Thursday.

Morgan Stanley reached out to Mitsubishi for a $9 billion lifeline during the depths of the crisis in 2008. In exchange for the money, the investment bank agreed to make quarterly dividend payments of roughly $200 million on Mitsubishi’s stake.

The firm was required to do so until the stock hit $37.875 for 20 out of 30 consecutive trading sessions — or until the two banks reached a new agreement. With the stock languishing below that target, Morgan Stanley insiders worried it could take years to reach that level.

For months, the Mitsubishi stake has been a source of aggravation for Mr. Gorman, who had inherited several headaches, some of which he dealt with by shedding nonessential divisions.

At a staff meeting in January, the chief executive expressed his frustration about the dividend payment. In response to questions about bonuses, he told employees that the firm needed to show restraint on compensation in part to appease shareholders and get the stock price up — generating an automatic end to the Mitsubishi payment.

When the news of the joint venture troubles crossed his desk around the same time, Mr. Gorman moved to use the information to his advantage. Ruth Porat, Morgan Stanley’s chief financial officer, who worked with Mr. Gorman and other senior Morgan executives on the latest deal, said the losses “took a logical discussion to the finish line.”

The parties were also cognizant that Goldman Sachs was moving to pay back a $5 billion crisis investment from Warren E. Buffett’s Berkshire Hathaway, which was completed this week.

In late March, Mr. Gorman flew to Japan to meet with executives of Mitsubishi and they reached an accord not long after. Morgan Stanley’s board voted to approve the pact this week.

The directors also met to review the firm’s first-quarter earnings, which Morgan Stanley released Thursday. Morgan Stanley posted a profit of $736 million, compared with $1.41 billion a year earlier. The results included a pretax loss of $655 million from the Mitsubishi joint venture.

The firm’s quarterly profit of 50 cents a share beat analysts’ expectations of 35 cents, according to Thomson Reuters.

Net revenue was $7.6 billion for the quarter, compared with $9.1 billion a year ago.

Although the Mitsubishi deal removes one obstacle to Morgan Stanley’s prospects, the firm still has plenty of work left on its turnaround, as it contends with a sluggish economic environment and a more restrictive regulatory regime. Its fixed-income and commodities division posted revenue of $1.77 billion, down 35 percent from year-ago levels. Asset management posted net revenue of $626 million, down 4 percent.

There were bright spots in the financials. Investment banking reported first-quarter revenue of $1.2 billion, up 15 percent from the period a year earlier. At the global wealth management division, which includes Morgan Stanley Smith Barney, revenue increased to $3.4 billion, from $3.1 billion a year ago.

Mr. Gorman struck an unusually positive note on the firm’s conference call with analysts, saying the changes he and his team had made over the last year or so were starting to pay off.

“We made clear progress increasing client share and this translated to financial performance. We have seen the benefits of our investments in hiring and the leadership as we execute across our businesses,” he said.