Citigroup, Morgan Stanley Discuss Brokerage Combo

"Even during the boom times, Citi was in too many businesses," Sohn said. "I think Citigroup is going back to what it used to be, a much smaller organization with significantly reduced costs."

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.

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AP Economics Writer Martin Crutsinger in Washington contributed to this report.

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