Morgan Stanley deal in works, Citigroup stock falls

The Baltimore Sun

NEW YORK - Citigroup Inc.'s stock sank yesterday to its lowest levels since November as investors wondered how much more cash the troubled bank will need.

Citigroup Inc., in an effort to raise capital, is hammering out a deal to sell the bulk of its retail brokerage to Morgan Stanley. The joint venture - expected to be announced this week - would lead to an after-tax gain for Citigroup of $5 billion to $6 billion, a person close to the negotiations said yesterday. The person spoke on condition of anonymity because he was not authorized to discuss the talks.

But maintaining cash levels that are high enough to make up for expected loan losses will be a big challenge for Citigroup.

"While we believe this deal will provide some near-term capital relief, more likely will be needed," Meredith Whitney, a financial analyst at Oppenheimer & Co., wrote in a note yesterday.

Citigroup stock fell $1.15, or 17 percent, to $5.60 - making it by far the steepest decliner among the 30 stocks that make up the Dow Jones industrial average - even though many industry analysts were positive about the deal. Lauren Smith at Keefe, Bruyette & Woods said in a note that the potential joint venture "seems like a win-win to us."

Morgan Stanley shares fell 27 cents to $18.79 after rising in earlier trading. Most bank stocks tumbled yesterday after President-elect Barack Obama said he plans fundamental changes in the way the second half of the government's $700 billion financial bailout is spent, targeting housing and small businesses.

Citigroup lost more than $20 billion between October 2007 and October 2008, and it is expected to post a deficit for the final quarter of last year when it reports those results next week. The government has lent Citigroup $45 billion and has agreed to absorb the losses on a pool of mortgages and other assets.

"We've seen various indications that Citibank's problems run deep. The fact that the government came in and backstopped some of their assets was one signal of that. Citi's selling the majority share of Smith Barney is probably another such signal," said Jim Wilcox, a professor at the Haas School of Business at the University of California at Berkeley.

The Wall Street Journal reported that the bank could report a fourth-quarter operating loss of at least $10 billion Jan. 22.

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