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This could quickly turn into a tale of Citigroup versus Morgan Stanley as the two financial giants disagree on the valuation of their stakes in the joint brokerage business Morgan Stanley Smith Barney.Citigroup’s Smith Barney merged with Morgan Stanley’s wealth management business in 2009, and per the agreement Morgan Stanley is allowed to began buying Citigroup’s stake in Smith Barney this year, the Wall Street Journal reported. Currently, Morgan Stanley owns 51% of Smith Barney, while Citigroup holds 49%—MS is interested in buying about 14% of Citi’s stake.
The transaction is something that both Citi and Morgan Stanley wants to see happen—
Full ownership of Morgan Stanley Smith Barney is a key component of Chief Executive James Gorman’s thrust to reduce Morgan Stanley’s reliance on its volatile sales-and-trading unit. For Citigroup, a sale will allow the No. 3 U.S. bank by assets to free up capital and exit from businesses outside its core retail- and commercial-lending focus.
But, the contentious issue is the fact that Smith Barney is valued differently on each bank’s books. Naturally, Morgan Stanley—who wants to buy parts of the company back—has valued the business at much less than Citigroup—who will be selling the brokerage back to MS. Smith Barney is currently valued at $15 billion on Morgan Stanley’s books, while it is worth $20 billion on Citigroup, due to differences in the company’s accounting methods, according to the WSJ.
But judging from recent analysts reports and Smith Barney’s weakening business, it appears Citigroup may ultimately have to take the loss. If the sale happens according to Morgan’s valuation, it would cause Citigroup to take a $2.8 billion write down, which would result in an after-tax earnings hit of $1.8 billion. That’s pretty precarious considering current economic conditions facing banks.