Morgan Stanley is in advanced talks with Citigroup Inc. to form a joint venture that would combine the brokerage units of both banks and give Morgan Stanley a 51 percent stake, according to a person familiar with the matter.
An agreement could be announced as soon as this weekend, said the person, who declined to be identified because the deal is not complete. Morgan Stanley would pay cash for control of the venture and would have an option to increase its ownership to as much as 100 percent in coming years, the source said.
The deal would give Citigroup cash in exchange for its Smith Barney brokerage while giving Morgan Stanley a bigger presence in the business of providing financial services to individuals, an area in which the firm has been trying to expand.
The combined brokerage would be the world's largest with more than 20,000 financial advisers, ahead of the new combination of Bank of America Corp. and Merrill Lynch & Co.
The sale of Smith Barney would be "a first step in Citigroup's dismantling," said William Smith, chief executive officer of Smith Asset Management Inc., a Citigroup shareholder. "This is positive news."
The news came as Citigroup announced that board member Robert Rubin, who has drawn heavy criticism for his role at the embattled bank, has resigned as a senior adviser.
Rubin, 70, will continue to serve as a board director until his term expires at the next annual meeting in the spring, Citigroup said.
As Citigroup's stock plunged during the past year, the veteran of Wall Street and Washington came under fire from critics who believed he should have had a more active role in preventing the bank's recent problems. Citi's predicament drove it in November to seek federal assistance.
Rubin was U.S. 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 did not keep Citigroup from taking on a huge amount of risk that relied on the housing market staying afloat.
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 it is expected to post yet another loss when it releases fourth-quarter results this month.
Bloomberg News and the Associated Press contributed to this article.