Citigroup signaled a breakup of its unwieldy financial supermarket model with a possible deal to sell a share of its prized retail brokerage business to Morgan Stanley, said several people with knowledge of the discussions, underscoring the enormous problems the bank continues to confront even after receiving taxpayer bailout funds.
Robert Rubin joined Citigroup in 1999 as an adviser to its senior executives.
Robert Rubin was the Treasury secretary for President Bill Clinton before joining Citigroup.
The new chapter of wrenching change came as former Treasury Secretary Robert E. Rubin, who came under fire for his strong support of that model in an advisory role that helped fuel the bank’s troubles, said he would resign.
The developments highlight how badly Citigroup has been damaged by the global financial crisis. Deepening losses, declining confidence in its leadership and a desperate need to raise capital have forced the bank to rethink the strategy it has clung to for years.
“This is either a one-off or the first inkling of a dismantlement of the company, taking apart of what John Reed and Sandy Weill did,” a senior executive with ties to the company said, referring to the two leaders who forged the landmark deal to bind Citicorp and Travelers Group in 1998.
With pressure mounting on Vikram S. Pandit, Citigroup’s chief executive, the company’s executives say the decision to split off Smith Barney, the “crown jewel” brokerage business he said he loved a few months ago, suggests the bank’s troubles are so deep that he is looking to reshape the company in a former image of itself.
While a deal is not yet final, such a change would position Citigroup to look more like Citicorp — a global franchise with strengths in trading, corporate and investment banking, and international consumer banking — than the bloated and unwieldy company it has become.
It also could lead to yet another shift in power on Wall Street. A joint venture with Morgan Stanley would create the nation’s largest brokerage network of 20,000 advisers, edging out Merrill Lynch’s thundering herd of brokers that Bank of America snapped up in September. Citigroup and Morgan Stanley had been in preliminary talks about a joint venture with Smith Barney as early as summer, according to people briefed on the talks.
As Citigroup braced for devastating fourth-quarter losses, with the government pressuring it to raise capital, Mr. Pandit restarted the discussions last month to shore up the bank’s financial condition. Both firms signed exclusivity agreements precluding either from discussing rival transactions with others. A deal could be announced as early as the middle of next week.
Citigroup is likely to undertake further changes, including a possible shake-up of its board, according to a person briefed on the situation. Although directors have been impressed by Mr. Pandit’s financial acumen, they continue to question his leadership ability. And Citigroup directors are considering replacing its chairman, Winfried F. W. Bischoff, with Richard D. Parsons, its lead director and the former Time Warner chairman, as early as next week, this person added. A Citigroup spokesman declined to comment.
For Mr. Rubin, his resignation is a sobering turn in a sterling career in Washington and on Wall Street. Since joining Citigroup in 1999 as an adviser to the bank’s senior executives, Mr. Rubin, 70, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has made one misstep after another.
When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible. During the same period, he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.
In his capacity as a senior adviser to Citigroup’s top executives and board, he pushed hard for the bank to step up its trading of risky mortgage-related securities and other complex investments as long as it improved oversight — a strategy critics say sowed the seeds of the bank’s current troubles. Mr. Rubin, whose contract specifically absolved him from daily operational responsibilities, has maintained that he could not have foreseen the current mess.
“This is not a decision that I have come to lightly,” Mr. Rubin said in a statement released by the bank. “But as I enter my 70s and with all that is now in place at Citi, I believe the time has come for me to make these changes.”
“My great regret,” he added, “is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today.”
Mr. Rubin, who has no severance contract and has turned down a bonus for the last two years, will still leave the bank with millions of dollars in accumulated pay. He has been awarded more than $126 million in cash and stock over the past decade, and has already withdrawn virtually all of his deferred compensation for estate planning purposes, said a person with knowledge of Mr. Rubin’s pay.
Mr. Rubin plans to deepen his involvement in public policy initiatives, charitable projects and personal hobbies like fly-fishing.
Mr. Rubin’s other role has been to serve as a sounding board and supporter for Citigroup’s senior leaders — including Mr. Pandit and Mr. Pandit’s predecessor, Charles O. Prince III. But Mr. Rubin’s influence in urging the bank to ramp up risk-taking, while failing to properly supervise the big bets taken on mortgages and other complex investments, put him under fire.
Citigroup has already posted more than $65 billion in losses and is likely to post its fifth consecutive quarterly loss this month. Every Wall Street firm has suffered from the financial crisis. But the scale and scope of Citigroup’s losses, from its investment banking to its credit card and retail franchises, has been particularly pronounced.
Mr. Rubin began backing away from his senior advisory role last summer when he started counseling Mr. Obama, according to several Citigroup executives who have spoken to him recently. Still, he held discussions with Treasury Secretary Henry M. Paulson Jr. as Citigroup negotiators orchestrated the bank’s bailout in late November. The government injected more than $45 billion into Citigroup and agreed to guarantee about $269 billion of illiquid mortgage-related assets.
Although Mr. Rubin had been contemplating leaving Citigroup for several months, he may have hastened his departure to try to get ahead of the criticism facing the bank’s board, said two people at Citigroup with knowledge of the situation. Mr. Rubin is fiercely protective of his reputation, and though he most likely would have been re-elected, he faced the potential embarrassment of a public struggle with investors who have been critical of his tenure and lucrative pay.
The Smith Barney joint venture will open a new chapter of wrenching change at Citigroup. Under the proposed deal, Morgan Stanley will pay Citigroup around $2.5 billion to bring itself up to 51 percent ownership of the brokerage business. That values Smith Barney at roughly $12 billion, people with knowledge of the matter said. Morgan would also retain the right to purchase the rest of the business in three to five years.
If the business produces strong revenue, both banks would benefit, and as the market improves, Citigroup stands to see the price it will be paid for its share increase.
Both Citigroup and Morgan Stanley would also reap sizable cost savings from combining their back-office systems and cutting back pay packages to retain and lure brokers from other firms. Both banks, as well as UBS, have been dangling huge sums in front of brokers at other firms because the brokerage business provides steady returns.
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