Morgan Stanley, Citigroup settle brokerage dispute

Tue Sep 11, 2012 2:59pm EDT
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By Lauren Tara LaCapra and David Henry

(Reuters) - Morgan Stanley (MS.N: Quote) and Citigroup Inc (C.N: Quote) have agreed to value their brokerage joint venture at $13.5 billion, settling a months-long dispute that notches a victory for Morgan Stanley.

The figure is far lower than the value Citigroup had assigned to the Morgan Stanley Smith Barney business on its balance sheet, and as a result Citigroup will take a $2.9 billion non-cash charge against earnings in the third quarter.

Morgan Stanley Smith Barney is the biggest brokerage in the United States with nearly 17,000 financial advisers and $1.71 trillion in assets.

The two banks agreed to the joint venture in 2009 in the wake of the financial crisis. Morgan Stanley, the majority owner, had always expected to buy out Citigroup, but it was unclear how much it would have to pay.

"It was a bad transaction for Citi, but the market has known it was probably going to go against them for awhile, so at least it brings closure," said David Trone, a bank analyst with JMP Securities. "Sometimes you just want to sell something and you'll take whatever price you can get."

On the plus side for Citigroup, its regulatory capital will get a lift from Morgan Stanley buying a bigger stake in the joint venture. The agreement also allows both banks to move forward with plans to realign their businesses.

Both stocks rose on the news. Citigroup shares were up 2.5 percent at $32.64, and Morgan Stanley shares were up 3.3 percent at $17.16 on Tuesday afternoon on the New York Stock Exchange.

The outcome of the dispute was keenly awaited by Wall Street because the decision could shed light on future profitability of the brokerage industry, which has been suffering through low interest rates and weak trading activity for some time.   Continued...

The Morgan Stanley worldwide headquarters building is pictured in New York June 22, 2012. REUTERS/Brendan McDermid