It was big news when Goldman Sachs (NYSE: GS) announced it would buy back the $5.5 billion in preferred shares it sold to Warren Buffett at the height of the financial crisis. The face-saving deal was exceedingly expensive for Goldman, as they carried a massive 10 percent dividend, which amounted to about $500 million a year, $15 a second by Buffett's calculation.

Morgan Stanley (NYSE: MS) faced a similar situation with the Mitsubishi UFJ investment that it just exited. Recall that MUFJ invested $9 billion in the fall of 2008. In something of a coup, Morgan Stanley was able to convince the Japanese company to convert most of its preferred shares into common shares ahead of schedule.

The result is that the bank saves a whopping $800 million a year in dividend payments and allows it to boost its Tier 1 common equity ratio to 14.5 percent from 11.0 percent.

Breakingviews calls the deal "a smart and opportunist move to offload the expensive capital that saved the Wall Street firm's hide in the 2008 meltdown." But it also notes that that increasing the capital base will make it harder for Morgan Stanley to achieve its target of mid-teen returns on equity.

The move raises the stakes when it comes to deploying the extras capital. Will the firm plow it into trading or buyback shares?

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