Citigroup, Morgan Stanley Merge Brokerage Units

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Citigroup and Morgan Stanley are combining their brokerage units, in a deal that has Morgan Stanley paying Citigroup $2.7 billion for a 51 percent stake in the joint venture. Citigroup's retail brokerage, Smith Barney, was once the crown jewel in its wealth management business.


And another big name is about to get smaller. Citigroup plans to become a leaner company. The financial services colossus says it's merging its Smith Barney brokerage unit with Morgan Stanley's wealth management division. That merger will create a single brokerage with $1.7 trillion in client assets. Citigroup is reportedly planning to sell more of its business. To find out more, we turn to NPR's Jim Zarroli. Good morning.

JIM ZARROLI: Good morning, Renee.

MONTAGNE: Well, let's start with the deal announced yesterday involving Morgan Stanley. What exactly does Citigroup hope to get from the merger? And I have to say leaner and smaller, but we're talking $1.7 trillion?

ZARROLI: Shows you how big Citigroup will remain even after these reductions. I think Citigroup hopes to get cash from the deal. Morgan Stanley is going to pay $2.7 billion. In exchange it's going to get 51 percent of the new brokerage company. There will also be some other cost savings for Citigroup. But the point is Citigroup is getting money, and it needs money badly right now. It's lost money for four straight quarters. It was really hurt very badly in the mortgage downturn. You may remember the federal government had to come in and guarantee some of its bad loans and buy up some of its stock. So it's under a lot of pressure to show regulators and also investors that it can stop the hemorrhaging.

MONTAGNE: And there are reports today that Citigroup will be selling off other divisions as well. Does Citigroup benefit then by becoming smaller? As you said, it needs the money. But what's the upside of being smaller?

ZARROLI: Well, yeah, it is going to be a lot smaller. The Wall Street Journal is quoting people who say it will be about a third smaller. It's going to get rid of two consumer finance units and its private label credit card business. I think what you're really seeing is a change in strategy. Citigroup basically became as big as it is partly through a lot of mergers, in particular the 1998 merger with the insurance company Travelers Group. That was the biggest merger in financial history.

The idea back then was that Citigroup would become what they call the financial supermarket. You know, it would offer consumer loans, business services, investment banking, insurance projects, all of them under the Citigroup brand. And it would do business all over the world.

Well, like the merger of AOL and Time Warner, you know, it sounded good on paper, but in practice it was just too hard to make it work. Investors were really unhappy with the way the company was managed. And then Citigroup also became a big player in the mortgage-backed securities business. And when that tanked, it lost a lot of money.

MONTAGNE: And next week Citigroup is supposed to announce its earnings report for the last quarter of 2008. What do you expect the company to say?

ZARROLI: Well, they're going to announce another loss for the last quarter of 2008, its fifth straight loss. They're also, I think, going to come out and say explicitly that it is changing course. For a long time Citigroup was sticking to this financial supermarket strategy, but they're not doing that anymore. The fact is that, you know, things haven't worked out well for the company, and it really needs to come out and present a new strategy. Don't forget it's received a lot of money from the taxpayers in recent months, and that really puts a new kind of pressure on them, not just from investors, but from the government as well.

MONTAGNE: Jim, thanks very much. NPR's Jim Zarroli.

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