By Lauren Tara LaCapra
June 21 Morgan Stanley said it will buy
the rest of its wealth-management joint venture with Citigroup
Inc by the end of the month, completing a deal started
during the financial crisis that was designed to stabilize both
Morgan Stanley will pay $4.7 billion for Citigroup's
remaining 35 percent stake in the joint venture that the two
banks set up in 2009. It is also paying about $2 billion to
redeem Citigroup's preferred securities.
In an interview, Chief Executive James Gorman said the deal
has given investors more assurance about Morgan Stanley's
business model, with a reliable stream of income from wealth
management helping to offset volatility in trading and
"You come in every day and know approximately how much money
you're going to make," he said.
Gorman has wanted to expand Morgan Stanley's retail
brokerage business since 2006, when he joined the bank as chief
operating officer for wealth management.
Gorman's first order of business was to evaluate whether
Morgan Stanley should fix its barely profitable wealth
management group or sell it. He told John Mack, then the bank's
chief executive, that the wealth management unit could earn
profit margins of 20 percent or more - 10 times its margins at
His forecast had a caveat, though: to become that
profitable, the wealth management business would not only have
to become more efficient, but also double its size by buying a
large competitor, like Citigroup's Smith Barney or UBS's wealth
The financial crisis was still some time away, and Mack was
focused on bolstering bond trading, where Morgan Stanley had
lagged Wall Street rivals. In lieu of an acquisition, Gorman
began fixing the wealth business by cutting costs, until an
opportunity presented itself a few years later.
On Jan. 13, 2009, Morgan Stanley and Citigroup announced a
deal that would eventually leave Morgan Stanley owning Smith
Barney. The transaction was designed to provide extra capital to
Citigroup, and give Morgan Stanley stable revenue after it was
hit by $9.4 billion in losses on subprime mortgage bets.
But it was not a straightforward acquisition: the two banks
agreed to put certain wealth-management businesses into a joint
venture, with Morgan Stanley holding a 51 percent stake. Morgan
Stanley planned to buy additional slices over the next five
years, at prices to be determined later.
The two banks sparred last summer over the value of the
joint venture. But in September they agreed that Morgan Stanley
would buy the rest of the business faster than previously
planned, pending regulatory approval, at an overall valuation of
$13.5 billion. Analysts widely considered the deal a bargain for
Citigroup said with the completion of the deal, a key
measure of its stability, the Basel III tier 1 common ratio,
will rise by 0.45 percentage points.
Morgan Stanley needed to clear two regulatory hurdles to
finish the deal. In March, the U.S. Federal Reserve approved
Morgan Stanley's plan to use capital to buy the final stake.
Friday's announcement pertained to a "process approval" by
regulators including the Fed and the Office of the Comptroller
of the Currency, as required by the 2010 Dodd-Frank law.
Morgan Stanley Wealth Management is the largest U.S.
brokerage by adviser headcount and client assets. The business
will have at least $138 billion in deposits by 2015, according
to Morgan Stanley, which could put it among the top 10 banks by
deposits in the United States.
The deal is expected to close by June 28. The bank will take
a $200 million hit against capital in the second quarter related
to the difference between the purchase price and its carrying
value for the remainder of the business.
Last year, Morgan Stanley's wealth management business,
which includes its share of the joint venture, delivered $13.5
billion in net revenue, or 44 percent of its overall adjusted
Analysts expect wealth management to make up more than half
of Morgan Stanley's revenue over time.