Citigroup, Morgan Stanley talks on merging units

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(Agencies)
Updated: 2009-01-10 15:08

NEW YORK – Officials at the embattled banks Citigroup and Morgan Stanley will negotiate over the weekend about possibly combining their wealth management businesses, a deal mostly aimed at bolstering Citi with much-needed cash.

In this Sept. 28, 2007 file photo, former Treasury Secretary Robert E. Rubin listens during a panel discussion, at the Clinton Global Initiative Annual Meeting in New York. Citigroup board member Robert Rubin, who has drawn heavy criticism for his role at the embattled bank, has resigned as a senior adviser. [Agencies]

The deal to merge Citi's Smith Barney with Morgan Stanley's comparable division was confirmed late Friday by a person familiar with the talks, who spoke on condition of anonymity because he was not authorized to discuss the matter.

The negotiations come as investors digested news that Robert Rubin, a senior adviser to Citi who has drawn heavy criticism, would resign from the bank. The person said it was Rubin's decision to leave Citigroup and that "there was no inside pressure," or government pressure.

Citi's shares sank nearly 6 percent on Friday.

Even before the economy started tanking, many shareholders had complained that Citigroup was too huge, and lagging its peers. Calls for a breakup have been going on for years, and have grown louder since the federal government has had to pump billions into the ailing company.

The New York-based bank late last year signed an agreement with the federal government to receive an additional $20 billion on top of the initial $25 billion it received.

Citigroup was hit particularly hard by the housing market downturn because the bank was heavily invested in mortgages and other loans. The company has reported four straight quarters of losses, and is expected to post yet another loss when it releases fourth-quarter results later this month.

If Morgan Stanley ends up buying Smith Barney, it "sounds like the beginning of a liquidation," said Christopher Whalen, managing director of Institutional Risk Analytics.

"Citi is under enormous pressure to downsize right now," added Bert Ely, a banking industry consultant in Alexandria, Va. After Citigroup received an extra dose of government funding, he said, "my sense is that the pressure has been increasing to accelerate the process."

In addition to the $45 billion infusion from the Treasury Department, which received preferred shares as part of the rescue, Citi also has received a government backstop for up to $306 billion in loans and securities backed by mortgages.

As Citigroup's stock plunged over the past year — it fell to $3.77 on Nov. 21 — Rubin, a former Treasury secretary, came under fire from critics who believed he should have had a more active role in preventing the bank's problems.

"Robert Rubin, in my opinion, spent a decade neglecting his duties as a director, just judging by their performance," Whalen said.

Rubin, 70, will continue to serve as a board director until his term expires at the next annual meeting in the spring, Citigroup said.

Rubin was U.S. Treasury Secretary under President Bill Clinton. For several decades before that, he worked at the Wall Street firm Goldman Sachs Group Inc. But his experience didn't keep Citigroup from taking on a massive amount of risk that relied on the housing market staying afloat.

Over the past six months, Rubin has slowly pared back his role at Citigroup, after serving as chairman for about a month following the ouster of former chairman and CEO Charles Prince in November 2007. Win Bischoff became Citi's chairman in December 2007, and investment banking head Vikram Pandit became CEO.

In August 2008, Rubin gave up his title as head of the board's executive committee, and became a "senior counselor" instead.

Leaving Citigroup, where he has worked for nearly 10 years, "is not a decision that I have come to lightly," Rubin said in a letter released by the bank. "But as I enter my 70s and with all that is now in place at Citi, I believe the time has come for me to make these changes."

He also wrote: "My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today."

Citigroup shares fell 41 cents, or 5.7 percent, to $6.75. Morgan Stanley shares were up 24 cents to $19.06.