Citigroup agreed to merge its Smith Barney brokerage with Morgan Stanley's wealth management unit, a big step in the possible dismantling of what was once the world's largest bank.
The joint venture will create the largest US brokerage, known as Morgan Stanley Smith Barney, with more than 20,000 brokers and $1.7 trillion in client assets. The brokerage force will surpass Bank of America Corp, which bought Merrill Lynch on January 1st.
Morgan Stanley will pay Citigroup $2.7 billion in cash for an initial 51 per cent stake in the venture that could increase to 100 per cent after five years, the companies said on yesterday.
Citigroup, meanwhile, is expected to shed "non-core" businesses and may announce plans on January 22nd, a person familiar with the matter said, the same day it is expected to post a big fourth-quarter loss.
The joint venture could be a major step in the dismantling of Sanford "Sandy" Weill's "financial supermarket" vision when his Travelers Group bought Citicorp in 1998 to create New York-based Citigroup.
Chief Executive Vikram Pandit is now shedding assets as the bank, the nation's third largest, was humbled by massive credit losses and writedowns tied to the world financial crisis. Citigroup lost $20.3 billion in the year ended September 30th, largely from mortgage and other complex debt.
"Citigroup's model was let's get bigger, and that will make us better," said Robert Millen, who helps invest $2.5 billion at Jensen Investment Management in Portland, Oregon and doesn't own the bank's shares. "It didn't work that way."
The two companies were awarded a combined $55 billion from the Treasury Department's $700 billion taxpayer-funded Troubled Asset Relief Program (TARP).
The venture will include Morgan Stanley's wealth management business, and Citigroup's Smith Barney, Smith Barney Australia and its British unit Quilter. It will not include Citi Private Bank or Nikko Cordial Securities.
Morgan Stanley may boost its stake in the venture to 65 per cent after three years, 80 per cent after four years, and 100 per cent after five years.
The banks expect $1.1 billion in cost savings, or 15 per cent of combined expenses, excluding broker commissions.
Reuters