New York: Officials at the embattled banks Citigroup and Morgan Stanley will negotiate over the weekend about possibly combining their wealth management businesses, a deal mostly aimed at bolstering Citi with much-needed cash.
The deal to merge Citi’s Smith Barney with Morgan Stanley’s comparable division was confirmed late on Friday by a person familiar with the talks, who spoke on condition of anonymity.
The negotiations come as investors digested news that Robert Rubin, a senior adviser to Citi who has drawn heavy criticism, would resign from the bank. The person said it was Rubin’s decision to leave Citigroup and that “there was no inside pressure,” or government pressure.
Citi’s shares sank nearly 6% on Friday.
Even before the economy started tanking, many shareholders had complained that Citigroup was too huge, and lagging its peers. Calls for a breakup have been going on for years, and have grown louder since the federal government has had to pump billions into the ailing company.
The New York-based bank late last year signed an agreement with the federal government to receive an additional $20 billion on top of the initial $25 billion it received.
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.
In addition to the $45 billion infusion from the Treasury Department, which received preferred shares as part of the rescue, Citi also has received a government backstop for up to $306 billion in loans and securities backed by mortgages.
As Citigroup’s stock plunged over the past year it fell to $3.77 on 21 November , Rubin, a former Treasury secretary, came under fire from critics who believed he should have had a more active role in preventing the bank’s problems.
Rubin, 70, will continue to serve as a board director until his term expires at the next annual meeting in the spring, Citigroup said.
Rubin was US Treasury Secretary under President Bill Clinton. For several decades before that, he worked at the Wall Street firm Goldman Sachs Group Inc. But his experience didn’t keep Citigroup from taking on a massive amount of risk that relied on the housing market staying afloat.