Citi Shares Fall Despite Talks With Morgan Stanley

Smith Barney for years has been regarded as one of Citigroup's few strong businesses.

In this Jan. 15, 2008 file photo, the Citigroup Center is shown in New York. A deal to combine the...

In this Jan. 15, 2008 file photo, the Citigroup Center is shown in 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 to $3 billion for a 51 percent stake in the brokerage Smith Barney, a person close to the negotiations said. If negotiations proceed through the weekend as they have been, an announcement could come as early as Monday Jan. 12, 2009 the person said. (AP Photo/Mary Altaffer, file)

(AP)

Citigroup is not alone in its problems, but where it differs from its peers — JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. — is the degree to which it bet on a strong housing market and ample liquidity in the credit markets. Even in July 2007, several months into the housing downturn, Citigroup's then-CEO Charles Prince told the Financial Times: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

Morgan Stanley — which got $10 billion in government financing — is likely to pay Citigroup between $2 billion and $3 billion in cash for a 51 percent stake in Citi's brokerage, Smith Barney, the person close to the talks said. In total, after accounting for the revaluation of Smith Barney, Citigroup would get a pre-tax gain of $10 billion, or $5 billion to $6 billion after taxes, the person said.

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Morgan Stanley would then have the option to buy the rest of Smith Barney over the next three to five years, the person said. The joint venture between Smith Barney and Morgan Stanley's retail brokerage, the former Dean Witter, would employ a team of more than 20,000 and rival Bank of America Corp.'s Merrill Lynch in size.

A fruitful merger could take a while, though.

"We expect that it will take three years to successfully merge these operations together, and in the meantime the retail business will face a severe downturn," wrote Brad Hintz, senior analyst at Bernstein Research.

Morgan Stanley did post a $2.37 billion loss during the quarter ended Nov. 30. But its woes have not been as huge as Citi's.

Banking regulators are now pushing Citi to replace its chairman, Sir Win Bischoff, in an effort to restore confidence in the New York-based bank after it needed billions of dollars in government support, according to a New York Times report. The Times and The Wall Street Journal said Monday that Richard Parsons, former CEO of Time Warner Inc. and a Citi director, is likely to succeed Bischoff.