Citi, M. Stanley in brokerage talks; Rubin quits

By Dan Wilchins and Jonathan Stempel

NEW YORK (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 any attrition, 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.

Brokerages are expected to suffer this year as broad weakness in stock and bond markets globally weigh on trading volume.

Combining the two businesses could help Morgan Stanley and Citigroup cut costs if they share back office functions, for example. But as Morgan Stanley takes over Citigroup's brokerage business, it might have to offer incentives for brokers to stay, potentially boosting costs.

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 stream, fewer than four months after Chief Executive John Mack turned it into a bank holding company.

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.