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Citigroup and Morgan Stanley likely to combine brokerages

NEW YORK — A deal to combine the brokerages of Citigroup and Morgan Stanley — which would give Citi more cash, and Morgan Stanley more manpower — appears just days away.

Morgan Stanley is likely to pay Citigroup between $2-billion and $3-billion for a 51 percent stake in the brokerage Smith Barney, a person close to the negotiations said.

Morgan Stanley would then have the option to buy Smith Barney over the next three to five years, the person said. The person spoke to the Associated Press on condition of anonymity because he was not authorized to speak about the ongoing talks.

If negotiations proceed through the weekend as they have been, an announcement could come as early as Monday, the person said.

Word of the negotiations came as investors digested news Friday that Robert Rubin, a senior adviser to Citi who has drawn heavy criticism, would resign and would not seek another term on the board.

A combination of the brokerage units would help Citigroup get more much-needed cash and cut costs, said Aite Group analyst Alois Pirker. The benefit for Morgan Stanley, Pirker said, would be a bigger staff to compete with other growing brokerages — particularly Merrill Lynch, which recently was acquired by Bank of America Corp.

Morgan Stanley applied to become a bank holding company last fall to get loans from the government and collect deposits — one of the few reliable sources of funding these days with the credit markets still squeezed.

The potential deal is another sign of the U.S. banking industry's consolidation into a few huge power players — ones that are still heavily reliant on the government for backing as the economy deteriorates.

"It's a bit of a worrying sign, I think," Pirker said. "It seems like the firms are too big as they are, from the brokerage perspective. They are racing to get bigger than the next one. One wonders if they'll have to shrink back again."

Morgan Stanley is one of the few remaining Wall Street firms after the credit crisis last year sent Lehman Brothers Holdings Inc. into bankruptcy and Merrill to Bank of America. JPMorgan Chase took over Bear Stearns.

Citi has reported four straight quarters of losses totaling $20.2-billion through September, and is expected to post another loss when it releases fourth-quarter results on Jan. 22.

Citigroup has received $45-billion in support from the government's $700-billion financial rescue fund, almost double what has been provided to any other major bank.

Citigroup and Morgan Stanley likely to combine brokerages 01/10/09 [Last modified: Wednesday, November 3, 2010 9:52am]
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