Citigroup, Morgan Stanley Discuss Brokerage Combo

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 headquarters is seen in Times Square in New York, in this September 18, 2008 file photo./ Pedestrians walk by a Citibank office in San Francisco this April 18, 2008 file photo.

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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 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.

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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.

The deal may also lead to a full-fledged merger between the two banks, he speculated.

"The ultimate goal could be to merge the two entities fully," Pirker said. "Morgan Stanley needs deposits, there's no doubt about that. They won't get that by telling brokers to get deposits from their clients."

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 government is not driving the negotiations between Citigroup and Morgan Stanley, people with knowledge of the situation said. They also spoke on condition of anonymity because they were not authorized to speak about the matter.