KEY POINTS:
Cochran Caronia Wallerby Bradley Keounand Christine Harper Citigroup may book a gain of as much as US$10 billion ($17 billion) by forming a brokerage venture with Morgan Stanley, helping to replenish capital depleted by the biggest losses in the bank's 197-year history, a source familiar with the
talks said.
The pretax gain would result from writing up the value of Citigroup's Smith Barney brokerage unit to the new price set by the deal, said the source, who declined to be identified because the talks are confidential.
The gain of US$5 billion to US$6 billion after taxes would flow into Citigroup's capital, a loan-loss cushion so eroded that the bank had to get US$45 billion of rescue funds last year from the US government.
"You're selling out the future to get through the crisis of the present, and unfortunately they don't have a lot of other choice," said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York.
The worst banking crisis since the Great Depression forced Citigroup chief executive Vikram Pandit to abandon his pledge not to sell Smith Barney.
For the past decade, the unit has been at the centre of the bank's plan to provide bond-underwriting, savings accounts and investment advice under a single umbrella. Citigroup spokesman Michael Hanretta declined to comment. Jim Wiggins, a spokesman for Morgan Stanley, didn't return calls seeking comment.
Talks on the plan to combine Smith Barney with Morgan Stanley's brokerage in a US$20 billion joint venture progressed over the weekend, another source said.
The deal may be announced as soon as mid-week, the source said.
Under the plan being considered, Morgan Stanley would pay US$2 billion to US$3 billion to New York-based Citigroup to obtain 51 per cent of a venture that would combine both firms' retail brokerage arms, sources said.
The new firm, tentatively named Morgan Stanley Smith Barney, would have about 22,000 brokers, exceeding the network created by Bank of America's January 1 takeover of Merrill Lynch, which have about 20,000 brokers between them.
Thousands of jobs could be threatened by the deal.
The move will lead to huge cost savings and heavy job losses, mostly in America, but with some positions at risk in London and Asia.
Negotiations follow the resignation of Robert Rubin, special adviser to the Citigroup board and a former US treasury secretary.
Citigroup's problems are thought to have made things awkward for Rubin, who has received US$115 million in pay since 1999, excluding stock options.
A Morgan source said that very few, if any, brokers will lose their jobs as the enlarged operation will need as many salesmen as possible to take on Merrill Lynch and Bank of America, which between them employ 16,000.
But the Morgan source added that significant cost savings will be made by axing thousands of jobs from back office functions such as information technology.
The new combine could reduce the total number of ancillary staff by about a third, which may result in between 7000 to 10,000 redundancies.
David Wyss, chief economist at Standard & Poor's, said the deal was a sign of desperate conditions. "All you are seeing on Wall St is one distress deal after another. Citigroup is effectively selling off parts [of itself] to raise cash."
- BLOOMBERG, OBSERVER
