Citigroup May Book $10 Billion Gain From Morgan Stanley Deal

By Bradley Keoun and Christine Harper

Jan. 12 (Bloomberg) -- Citigroup Inc. may book a gain of as much as $10 billion by forming a brokerage venture with Morgan Stanley, helping to replenish capital depleted by the biggest losses in the bank’s 197-year history, a person familiar with the talks said.

The pretax gain would result from writing up the value of Citigroup’s Smith Barney brokerage unit to the new price set by the deal, said the person, who declined to be identified because the talks are confidential. The gain of $5 billion to $6 billion after taxes would flow into Citigroup’s capital, a loan-loss cushion so eroded that the bank had to get $45 billion of rescue funds last year from the U.S. government.

“You’re selling out the future to get through the crisis of the present, and unfortunately they don’t have a lot of other choice,” David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, said in a Jan. 9 interview.

The worst banking crisis since the Great Depression forced Citigroup Chief Executive Officer Vikram Pandit to abandon his pledge not to sell Smith Barney. For the past decade, the unit has been at the center of the bank’s plan to provide bond- underwriting, savings accounts and investment advice under a single umbrella.

Citigroup spokesman Michael Hanretta declined to comment. Jim Wiggins, a spokesman for Morgan Stanley, didn’t return calls seeking comment.

‘Morgan Stanley Smith Barney’

Talks on the plan to combine Smith Barney with Morgan Stanley’s brokerage in a $20 billion joint venture progressed over the weekend, another person briefed on the talks said. The deal may be announced as soon as mid-week, this person said.

Under the plan being considered, Morgan Stanley would pay $2 billion to $3 billion to New York-based Citigroup to obtain 51 percent of a venture that would combine both firms’ retail brokerage arms, people familiar with the plan said.

The new firm, tentatively named Morgan Stanley Smith Barney, would have about 22,000 brokers, exceeding the network created by Bank of America Corp.’s Jan. 1 takeover of Merrill Lynch & Co., which have about 20,000 brokers between them.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.