BANKING

Morgan Stanley to buy share of Citigroup brokerage firm

US banking giant Citigroup and investment bank Morgan Stanley are said to be in advanced talks to create a joint venture of their brokerage activities. Morgan Stanley would take overall control of Smith Barney, the brokerage unit of Citigroup.

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REUTERS - Citigroup Inc is in advanced talks to sell its Smith Barney brokerage unit to Morgan Stanley, a person familiar with the matter said on Friday, in a move that would further dismantle the financial supermarket that has been bailed out by the U.S. government.

Under the deal being discussed, the two banks would set up a joint venture. Morgan Stanley would control it with a 51 percent stake and expect to buy Citi's 49 percent share over three to five years, the person said. Talks are "serious" and "advanced" but may still fall through. Both banks declined to comment.

Separately, former U.S. Treasury Secretary Robert Rubin resigned immediately as a senior counselor to New York-based Citigroup, following months of criticism of his performance, as the bank's sinking share price led to a government rescue. The 70-year-old Rubin will remain a director until the bank's annual meeting later this year. He joined Citigroup in 1999.

A combined brokerage would have more than 23,000 financial advisers before attrition, ranking as the world's largest retail brokerage, surpassing rivals Bank of America Corp and Wells Fargo & Co.

Citigroup ended September with 14,735 brokers, and Morgan Stanley ended November with 8,426. Last week, Bank of America bought Merrill Lynch & Co, and Wells Fargo bought Wachovia.

Citigroup could boost its capital levels by doing the deal, and Morgan Stanley could diversify its sources of revenue. The U.S. Federal Reserve is pressing the two banks to do a deal because of the potential benefits to both, CNBC reported on Friday.

Combining the two businesses could also help Morgan Stanley and Citigroup cut costs. Brokerages are expected to suffer this year as broad weakness in stock and bond markets globally weigh on trading volume.

New Morgan Stanley Ties For Pandit

A joint venture would reestablish ties between Citigroup Chief Executive Vikram Pandit and Morgan Stanley, which he left in 2005 after being passed over for a promotion in favor of fixed-income chief Zoe Cruz. She had faulted Pandit for being unwilling to take enough risk.

Shedding Smith Barney would be the latest, and perhaps the boldest step in dismantling Sanford "Sandy" Weill's original conception for Citigroup when his Travelers Group Inc bought Citicorp to create the world's largest financial services conglomerate.

Pandit is trying to shed hundreds of billions of dollars of assets and reduce risk after Citigroup suffered $20.3 billion of losses in the year ended Sept 30. The bank has taken $45 billion from the government's Troubled Asset Relief Program, $20 billion of which came from a federal bailout in November that will also limit potential losses on some assets.

Placing the business in a joint venture would likely allow Citigroup to record an immediate accounting gain, boosting its capital. And the bank would still be able to receive revenue from the business.

A brokerage venture could allow Morgan Stanley to diversify its revenue streams, fewer than four months after Chief Executive John Mack turned it into a bank holding company. Many traditionally strong businesses for Morgan Stanley, such as hedge fund prime brokerage and commodities trading, are expected to be less profitable in coming years than they were a few years ago.

But the deal may not be entirely positive for Morgan Stanley. As it takes over Citigroup's brokerage business, it might have to offer incentives for brokers to stay, potentially boosting costs.

Morgan Stanley plans to reduce risk and become more aggressive in gathering deposits. It got $10 billion of TARP money.

The combined business would likely have Morgan Stanley Co-President James Gorman as chairman, and Citigroup Global Wealth Management President Charles Johnston as its chief executive. A majority of directors would come from Morgan Stanley.

Citigroup's wealth management business, which includes Smith Barney, generated a $1.59 billion profit in the year ended Sept 30, 2008 and $13.22 billion of revenue.

Citigroup overall lost $20.3 billion, largely because of exposure to mortgages and other toxic debt.

In its fiscal year ended Nov 30, Morgan Stanley's wealth management unit generated $1.15 billion of pre-tax income on net revenue of $6.3 billion, excluding gains from selling of a Spanish unit. Overall revenue totaled about $24.7 billion.

Citigroup shares closed Friday down 41 cents, or 5.7 percent, at $6.75 on the New York Stock Exchange. Morgan Stanley shares rose 24 cents, or 1.3 percent, to $19.06.

Rubin

In a letter to Chief Executive Vikram Pandit, Rubin praised Citigroup management for making the "tough decisions" to restore the bank to health, but admitted to not having foreseen the credit crisis and market deterioration.

Citigroup's share price has fallen roughly 88 percent in the last two years. Rubin himself declined a bonus.

"My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces," Rubin wrote in a letter to Pandit.

Rubin was one of Pandit's biggest supporters on Citigroup's board, and his departure could remove a base of support, a person familiar with the matter said.

"It's a long time coming," said Walter Todd, a portfolio manager at Greenwood Capital Associates in Greenwood, South Carolina, referring to the departure. "The near-collapse of the firm was under his watch."

Rubin said he plans to focus more on outside activities and organizations, and "intensify" his work in public policy.

A Nov. 23 front-page story in The New York Times called Rubin "an architect of the bank's strategy" to chase profit by expanding in collateralized debt obligations and other risky products.

The strategy backfired as credit markets tightened and housing prices fell. Citigroup has previously disputed the Times' characterization of Rubin's role.

Rubin joined Citigroup just after the Clinton administration and Congress agreed to abandon a Great Depression-era rule, known as the Glass-Steagall Act, that kept banks, securities firms and insurance companies separate.

He initially joined an Office of the Chairman that included Weill, who had lobbied to end such rules. Rubin became senior counselor last August.

Globally, Rubin may be best known as U.S. Treasury Secretary between 1995 and 1999. Before heading to Washington, Rubin had spent 26 years at Goldman Sachs & Co.

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