Citigroup CEO Vikram Pandit plans to announce in the coming days a major shift away from the "financial supermarket" model that has guided the bank for the last decade.
The development comes as Citigroup (NYSE: c) and Morgan Stanley (NYSE: ms) work toward an agreement creating a joint venture of Citi's Smith Barney brokerage unit, which sources say could be announced after today's closing bell.
The deal would provide a capital boost for Citigroup. But it will also be the first step toward the breakup of the massive investment bank, which is under pressure to raise capital to stem losses.
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The eventual breakup of the supermarket model—in which a bank handled a client's every financial need, from investing to insurance—would mean that Citigroup would become more of a traditional bank like JP Morgan Chase.
The core of the remaining company would be a global wholesale bank with some investment banking capability and include private and regional banking.
Citigroup's former CEO Sandy Weill developed the financial supermarket model in 1998 when he fought successfully to allow the merger of Travelers with Citibank. The merger circumvented the Depression-era Glass-Steagall Act that separated commercial and investment banking and helped pave the way for the banking behemoths that have been crumbling during the credit crisis. Glass Steagall was repealed in 1999.
The dismantling of Citigroup's supermarket model is being made under pressure from the federal government, which has loaned Citigroup $45 billion in recent months and agreed to absorb the losses on a huge pool of mortgages and other assets.
Citigroup is expected to announce another massive loss for its fourth quarter.
Morgan Stanley has been ailing as well, albeit not as bad as Citigroup. This deal gives Morgan's new business model of providing advice to large companies and small investors a boost.
The firm will control 51% of the joint venture with the right to increase its share in future years. In effect Morgan Stanley would control the largest brokerage firm, with 18,000 financial advisers compared to the 16,000 at the Merrill Lynch subsidiary of Bank of America (NYSE: bac).
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