Citi Could See $3 Billion From Smith Barney Deal

Morgan Stanley could pay $2 billion to $3 billion or more for a controlling stake in Citigroup's Smith Barney retail brokerage business, two people familiar with the matter said.

The cash would be a big boon for Citigroup , which is under tremendous pressure from the  government to shore up its balance sheet after taking $45 billion of government capital in October and November, they said.

The bank is considering multiple options in addition to the Morgan Stanley deal.

The deal with Morgan Stanley has a "glitch" that a source tells CNBC, is not insurmountable. If it proceeds as expected, the announcement will be made either on Tuesday or Wednesday.

A banker with direct knowledge of the deal said Citi would receive more than $2.5 billion to give its 51 percent stake in the joint venture to Morgan Stanley. In three years, Morgan would expand its stake to 80 percent. After five years, Citi has a "put" on the remaining 20 percent.

Citi has been stung by criticism that this is a sign that the firm is retreating from its financial supermarket model, but this banker says privately Citi is admitting that it is now reigning its massive reach and is in the process of transforming itself into a core business as a "global wholesale bank" which deals with major companies and the super wealthy.

For now, Citgroup people are saying they are not looking to sell its Grupo Financiero Banamex, Citigroup's retail-banking business in Mexico. Citi will also keep its private bank, one of the crown jewels of the retail business, because it deals with the super wealthy. But in that framework, the Smith Barney retail business is less of a priority.

These statements should be taken in the context that Citi is being run not just by CEO Vikram Pandit and his team, but also the Federal government which is increasingly worried about writedowns and the need for capital. Citi is being pressured by the Feds to raise capital amid a likely big loss for the fourth quarter and this is one way to accomplish that.

Dismantling the rest of Citigroup would be difficult, one person said, noting that there are not many buyers for financial assets now. A few smaller businesses or groups may be sold off--Citi has discussed internally the possibility of selling its Banamex Mexican banking unit, for example. But splitting up Citigroup completely is unlikely, he added.

Crucial Capital

Capital is crucial for Citigroup, which has posted more than $20.3 billion of net losses for the four quarters ended Sept 30. The bank said late Thursday that it has about $2 billion of gross exposure to LyondellBasell, whose U.S. operations and nearly 80 other affiliates filed for bankruptcy protection this week.

That should result in a $1.4 billion pre-tax charge in the just completed fourth quarter, the bank said.

The bank faces massive writedowns in areas ranging from credit cards to mortgages in the coming quarter. Analysts expect the company to lose 78 cents a share this quarter before special items, according to Reuters Estimates.

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Citigroup's directors are considering replacing the bank's chairman, Sir Win Bischoff, with lead director and former Time Warner Chairman Richard Parsons as soon as next week, the New York Times reported. Citigroup declined to comment.

Bischoff would not be the only official to depart Citigroup. Robert Rubin, a senior counselor at the bank, stepped down Friday. He will remain on Citigroup's board until the annual meeting later this year.

—Reuters contributed to this article

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