Citi ends its one-stop approach

Joint venture with Morgan Stanley helps company streamline and raises $2.7b in much-needed cash

In a joint venture, Morgan Stanley will combine Citigroup's brokerage, Smith Barney, with its wealth management business. (Mark Lennihan/Associated Press/File 2008)

NEW YORK - The original financial supermarket is dead. Citigroup signaled the end of a decade-long experiment to create one-stop shopping for financial services - everything from consumer loans to investment banking - with yesterday's revelation that it was merging its Smith Barney brokerage into a joint venture with Morgan Stanley.

The deal, which will give Citigroup $2.7 billion in badly needed cash as it gives up control of Smith Barney, comes as the company still struggles in the aftermath of the mortgage and credit crisis. There is speculation chief executive Vikram Pandit, who for months supported Citigroup as a "universal bank," will be taking further steps to simplify and streamline the company.

And many people on Wall Street believe Citigroup could be headed for an even larger-scale dismantling if the federal government - which now has a stake in Citi thanks to its recent bailout - has its way.

"I think within 12 months, Citigroup no longer exists," said William Smith at Smith Asset Management, who owns Citigroup shares. He has been calling for a breakup of Citigroup for years.

Citigroup was the quintessential financial supermarket, cobbled together over decades by Sandy Weill - the former chief executive who is both lauded for bringing Citigroup its biggest profits ever and criticized for creating a conglomerate that was impossible to manage.

The idea behind the supermarket is that average people can do all saving, borrowing, and investing with one company. Citi's announcement further undermines the idea that one company can handle such diverse businesses at once.

JPMorgan Chase & Co.'s model is essentially a supermarket, too, but it does not have as large an international presence as Citigroup has had. Bank of America Corp. has many disparate businesses, too, but it maintains a strong focus on its US operations.

"The problem with Citi is the model, the execution, the management," Smith said. "How do you go a decade without integrating?"

Bank of America and JPMorgan Chase also took fewer risks than Citi took when it came to the now-failed investments in mortgage-backed securities, and so their losses were much less than the big financial supermarket suffered.

Citigroup and Morgan Stanley plan to combine Citi's brokerage, Smith Barney, with Morgan Stanley's wealth management business.

The capital from the Morgan Stanley deal, however, is probably not enough to make up for upcoming losses. And if the government decides it does not want to continue propping up banks like Citigroup, its dismantling could accelerate.