Citi inches toward deal but shares off on fear of Q4 loss

By Dan Wilchins and Joseph A. Giannone

NEW YORK (Reuters) - Citigroup Inc inched closer to selling a stake in its Smith Barney retail brokerage to Morgan Stanley, but its shares fell on concerns about the health of the bank's balance sheet and its fourth-quarter results.

Citigroup shares closed down $1.15, or 17 percent, to $5.60 on the New York Stock Exchange, bringing the company's market value down to $30.5 billion. The shares hit their lowest level since November 24, a day after the company received a $20 billion capital infusion from the U.S. government.

JPMorgan Chase & Co and Bank of America Corp shares also dropped on concerns about their credit problems.

Governments worldwide have been infusing cash into major banks and taking stakes in them as battered banks look to shore up capital. Citi's move to sell a stake in one of its prized assets is the latest sign that the global financial sector is still enmeshed in a widening credit crisis that started in 2007.

Citigroup and Morgan Stanley have agreed on major terms, and are expected to announce a deal by mid-week, a person familiar with the matter said.

Morgan Stanley would combine Citigroup's Smith Barney unit with its own retail business to create the world's largest network of brokers, according to sources.

Citigroup, the third-largest U.S. bank by assets, would retain a 49 percent stake in the joint venture, and receive a payment in excess of $2.5 billion and would write up the value of its brokerage business, boosting capital.

Morgan Stanley would expect over time to buy the whole of Smith Barney.

A joint venture could give Citigroup an additional $5 billion to $6 billion of tangible common equity, a boon for a bank under U.S. government pressure to shore up a balance sheet battered by more than $20 billion of net losses over the four quarters ended September 30, 2008.

The company may record a fourth-quarter operating loss in excess of $10 billion, The Wall Street Journal reported on Monday, underscoring the depth of its difficulties.

"They're selling one of the crown jewels, which you only do if you really have to," said Bill Fitzpatrick, an analyst at Optique Capital Management in Milwaukee, which does not own Citigroup shares.

That was the second injection for Citigroup, which in October received $25 billion of money under the Troubled Asset Relief Program. Citigroup's extensive capital support from the government has come at a price: the U.S. is exerting more pressure on the bank to improve its balance sheet.

Regulators are also pressing for the bank to replace its chairman, Sir Win Bischoff, the New York Times reported on Monday.

Richard Parsons, former chairman of Time Warner Inc, appears to be at the top of the short list of successors, and an announcement could come as soon as this week, the newspaper reported.

BANKS, BROUGHT TO YOU BY TAXPAYERS