Citi may gain $10 bln on Morgan Stanley deal

Bloomberg

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Citigroup may book a gain of as much as $10 billion by selling control of its brokerage to Morgan Stanley, helping to replenish capital depleted by the biggest losses in the bank’s history, a person familiar with the talks said.

The worst banking crisis since the Great Depression forced Citigroup Chief Executive Officer Vikram Pandit, 51, to abandon his pledge not to sell Smith Barney. For the past decade, the unit has been at the center of the bank’s plan to provide bond-underwriting, savings accounts and investment advice under a single umbrella.

"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," David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, said in a Jan. 9 interview.

The pretax gain would come from writing up the value of Citigroup’s Smith Barney unit to a new price set by the deal, said the person, who declined to be identified. The gain of $5 billion to $6 billion after taxes would flow into Citigroup’s capital, a loan-loss cushion so eroded that the New York-based bank had to get $45 billion of rescue funds last year from the U.S. government.

The Wall Street Journal reported Monday that the bank may report a fourth-quarter operating loss of at least $10 billion on Jan. 22.

Talks on the plan to combine Smith Barney with Morgan Stanley’s brokerage in a $20 billion joint venture progressed over the weekend, another person briefed on the talks said.

Rubin’s departure
Former U.S. Treasury Secretary Robert Rubin, 70, who joined the company in 1999 and had opposed calls to break it up, said Jan. 9 that he plans to quit the board.

Under the plan being considered, Morgan Stanley would pay $2 billion to $3 billion to Citigroup to obtain 51 percent of a venture that would combine both firms’ retail brokerage arms, people familiar with the plan 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 Jan. 1 takeover of Merrill Lynch, which have about 20,000 brokers between them.

Citigroup posted $10.4 billion of net losses in the first nine months of 2008, putting the bank on pace to post its worst year since predecessor City Bank of New York was founded in 1812.

Beleaguered by writedowns on mortgage-related bonds, losses on commercial real estate loans and costs related to the bankruptcy of chemicals maker LyondellBasell Industries, Citigroup probably lost another $5.82 billion in the fourth quarter, Sandler O’Neill & Partners analyst Jeff Harte estimated in a Jan. 9 report.

That figure doesn’t include a $4 billion one-time gain that Citigroup expects from the sale, completed last month, of its retail banking operations in Germany. That unit was also sold by Pandit in an effort to free up capital.

Citigroup, which has 352,000 employees and 200 million customers and does business in more than 100 countries, was pieced together through acquisitions during a 17-year span by former Chairman Sanford "Sandy" Weill, who stepped down from a full-time role in October 2003.

Pandit, hired in December 2007 following the ouster of Weill’s handpicked successor, Charles O. "Chuck" Prince, vowed to conduct a "dispassionate" review of Citigroup’s business mix, and whether the company was too big to manage, as some analysts and investors contended.

Focusing on what is left
The decision to sell majority control of Smith Barney is an acknowledgement by Pandit that relinquishing responsibility for the unit may simplify the task of managing Citigroup’s remaining businesses, one of the people familiar with the plan said. The company had the worst stock performance for two years in a row among large U.S. banks, as measured by the KBW Bank Index.

"There’s a growing dissatisfaction with the slowness with which Citi seems to be dealing with its issues, particularly in terms of right-sizing the company," said Bert Ely, chief executive officer of banking industry consultant Ely & Co. in Alexandria, Virginia. That requires "not only substantial downsizing of the balance sheet, but also disposing of and selling off activities that are not crucial to its long-term strategy."Richard Parsons, 60, Citigroup’s lead outside director, told the Wall Street Journal that the board has confidence in Pandit’s leadership. Parsons may be named later this month to replace board Chairman Win Bischoff, 67, the Journal reported Monday.