By David Henry and Lauren Tara LaCapra
July 19 Morgan Stanley reckons the retail
brokerage business it jointly owns with Citigroup Inc is
worth less than half as much as Citigroup believes, Citi said in
a filing on Thursday with the Securities and Exchange
Citigroup and Morgan Stanley exchanged appraisals of the
joint venture because Morgan Stanley plans to buy an additional
14 percent share of the brokerage. Morgan Stanley currently owns
51 percent of the business known as Morgan Stanley Smith Barney,
by some measures the largest U.S. retail brokerage.
Citigroup said its appraisal "slightly exceeded" its own
carrying value of approximately $11 billion for its 49 percent
To set a final price for the 14 percent stake, the two sides
will use a third-party appraisal process that will conclude at
the end of August, Citigroup said.
The outcome could result in a "significant" charge to
Citigroup net income in the third quarter, the filing noted,
adding that any impairment would not impact the bank's Basel III
regulatory capital position or its cash holdings.
A Morgan Stanley spokes woman declined to comment on the
The joint venture was created in 2009, c o m ing out of the
financial crisis as Citigroup, which was badly crippled by
losses on mortgage-related securities, set out to shrink its
balance sheet, partly by selling its Smith Barney brokerage.
Since then , the value of brokerage assets has waxed and
waned with customer sentiment about Wall Street and the outlook
for investment returns.
The Morgan Stanley Smith Barney business has not been
performing as well as initially projected by Morgan Stanley due
to weak client trading activity and the cost of combining the
Morgan Stanley now aims for its wealth management
operations, which are mainly comprised of its stake in Morgan
Stanley Smith Barney, to earn pre-tax profits that are in the
mid-teens as a percentage of revenue by the middle of next year
-- bel o w the 20 percent goal originally set by Chie f Executive
For Morgan Stanley, buying more of the venture is part of a
strategy to emphasize the stability of wealth management revenue
streams over the volatility of investment banking.
Morgan Stanley has options to buy the rest of the venture
Citi called its valuation of the venture "reasonable and
supportable, " adding i t expects to close the sale of the 14
percent stake to Morgan Stanley by Sept. 7 .