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Morgan Stanley could pay $2-3 billion for Smith Barney

NEW YORK (Reuters) - Morgan Stanley could pay $2 billion to $3 billion or more for a controlling stake in Citigroup Inc.’s Smith Barney retail brokerage business, two people familiar with the matter said.

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The cash would be a big boon for Citigroup, which is under tremendous pressure from the U.S. government to shore up its balance sheet after taking $45 billion of government capital in October and November, they said.

The bank is considering multiple options in addition to the Morgan Stanley deal.

“Everything is on the table,” one of the people familiar with the matter said, adding that the bank may put its toxic assets into a separate unit as a preliminary step toward shedding them.

Dismantling the rest of Citigroup would be difficult, one person said, noting that there are not many buyers for financial assets now. A few smaller businesses or groups may be sold off -- Citi has discussed internally the possibility of selling its Banamex Mexican banking unit, for example. But splitting up Citigroup completely is unlikely, he added.

Terms of the Morgan Stanley deal are still being worked out. Under the current plan, Citigroup and Morgan Stanley would set up a joint venture for their combined retail brokerage businesses. Morgan Stanley would own 51 percent, control the venture, and expect to buy Citigroup’s remaining share over the next five years.

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Morgan Stanley would initially pay Citigroup around $2 billion to $3 billion or more, with further payments coming as Morgan Stanley bought more of the business.

When Citigroup does the deal, it will likely be able to boost the value on its books of its remaining stake in the Smith Barney business, creating additional capital.

Capital is crucial for Citigroup, which has posted more than $20.3 billion of net losses for the four quarters ended Sept 30. The bank said late on Thursday that it has about $2 billion of gross exposure to LyondellBasell, whose U.S. operations and nearly 80 other affiliates filed for bankruptcy protection this week.

That should result in a $1.4 billion pre-tax charge in the just completed fourth quarter, the bank said.

The bank faces massive writedowns in areas ranging from credit cards to mortgages in the coming quarter. Analysts expect the company to lose 78 cents a share this quarter before special items, according to Reuters Estimates.

Citigroup’s directors are considering replacing the bank’s chairman, Sir Win Bischoff, with lead director and former Time Warner Chairman Richard Parsons as soon as next week, the New York Times reported. Citigroup declined to comment.

Bischoff would not be the only official to depart Citigroup. Robert Rubin, a senior counselor at the bank, stepped down on Friday. He will remain on Citigroup’s board until the annual meeting later this year.

Morgan Stanley was not immediately available for comment.

Reporting by Dan Wilchins; Editing by Xavier Briand

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