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Citigroup sinks despite sale talks

Citigroup may sell its retail brokerage to Morgan Stanley. Citigroup may sell its retail brokerage to Morgan Stanley. (Richard Drew/Associated Press)
Associated Press / January 13, 2009
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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 Smith Barney brokerage to Morgan Stanley. The joint venture - expected to be disclosed this week - would lead to an after-tax gain for Citigroup of about $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 ongoing talks.

But maintaining cash levels that are high enough to make up for upcoming loan losses remains 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 to $5.60 - even though many industry analysts were positive about the deal. Lauren Smith at Keefe, Bruyette & Woods said in a note the potential joint venture "seems like a win-win to us."

Morgan Stanley shares fell 27 cents to $18.79. Most bank stocks tumbled yesterday after President-elect Barack Obama said he plans to fundamentally change the way the second half of the government's $700 billion financial bailout fund is spent. He said he will target housing and small businesses.

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

Morgan Stanley is likely to pay Citigroup between $2 billion and $3 billion in cash for a 51 percent stake in Smith Barney, the person close to the talks said.

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