- The Washington Times - Sunday, January 11, 2009

NEW YORK (AP) | A deal to combine the brokerages of Citigroup and Morgan Stanley — which would give Citi more cash and Morgan Stanley more manpower — appears just days away.

Morgan Stanley is likely to pay Citigroup between $2 billion and $3 billion for a 51 percent stake in the brokerage Smith Barney, a person close to the negotiations said.

Morgan Stanley would then have the option to buy Smith Barney over the next three to five years, the person said. The person spoke on the condition of anonymity because he was not authorized to speak about the ongoing talks.

If negotiations proceed through the weekend as they have been, an announcement could come as early as Monday, the person said.

Word of the negotiations came as investors digested news Friday that Robert E. Rubin, a senior adviser to Citi who has drawn heavy criticism, would resign and would not seek another term on the board.

A combination of the brokerage units would help Citigroup get more much-needed cash and cut costs, said Aite Group analyst Alois Pirker. The benefit for Morgan Stanley, Mr. Pirker said, would be a bigger staff to compete with other growing brokerages - particularly Merrill Lynch, which recently was acquired by Bank of America Corp.

The deal also may lead to a full-fledged merger between the two banks, he speculated.

“The ultimate goal could be to merge the two entities fully,” Mr. Pirker said. “Morgan Stanley needs deposits, there’s no doubt about that. They won’t get that by telling brokers to get deposits from their clients.”

Morgan Stanley applied to become a bank-holding company in the fall to get loans from the government and collect deposits — one of the few reliable sources of funding these days with the credit markets still squeezed.

The government is not driving the negotiations between Citigroup and Morgan Stanley, people with knowledge of the situation said. They also spoke on the condition of anonymity because they were not authorized to speak about the matter.

There were no talks scheduled for this weekend between the Treasury Department and Citigroup officials.

The potential deal is another sign of the U.S. banking industry’s consolidation into a few huge power players — ones that are still heavily reliant on the government for backing as the economy deteriorates.

“It’s a bit of a worrying sign, I think,” Mr. Pirker said. “It seems like the firms are too big as they are, from the brokerage perspective. They are racing to get bigger than the next one. One wonders if they’ll have to shrink back again.”

Morgan Stanley is one of the few remaining Wall Street firms after the credit crisis last year sent Lehman Brothers Holdings Inc. into bankruptcy and Merrill Lynch to Bank of America. Private analysts said Citi’s interest in raising revenue with a Smith Barney deal was likely aimed at demonstrating to the government and Wall Street investors that it was working to bolster Citi’s finances.

The company has reported four straight quarters of losses totaling $20.2 billion through September and is expected to post yet another loss when it releases fourth-quarter results Jan. 22. Thomson Reuters said analysts it surveyed expect Citi to report a loss, on average, of $1.14 a share for the October-December period.

Citigroup has received $45 billion in support from the government’s $700 billion financial-rescue fund, an amount that is almost double what has been provided to any other major bank.

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