Citi: What Sandy Built, Pandit Will Dismantle?

So much for Citi CEO Vikram Pandit’s endorsement of the universal banking model.

So much for Citi CEO Vikram Pandit’s endorsement of the universal banking model. The Wall Street Journal is reporting that Citigroup has put Smith Barney up for sale—or a joint venture. (Separately, the company announced that Robert Rubin resigned as Senior Counselor, effective today. The former treasury secretary, who was one of Citi’s highest paid executives, has come under fire for his role in the financial troubles of the firm; after all, despite Rubin’s sage advice, Citi’s mistakes cost the company more than $60 billion in write-downs through the third quarter of 2008.)

Citing unnamed sources, The Journal says that Citi is “in talks” to sell its Smith Barney brokerage and asset-management unit. The Journal says, “One possibility being seriously considered is a joint venture with Morgan Stanley, these people said. No deal has been reached yet.” A Citigroup spokesman declined to comment on the rumors.

Last September, Pandit told this magazine that—and this is a direct quote from our story—“Wealth management is a core business for us. In fact, we have the second largest wealth management franchise in the world.” He also told us: “When I came on board, we reviewed, in extreme detail, the various business lines of Citi, and I came away convinced that the universal banking model is the ideal one to capitalize on global growth trends.”

But that was then. One hedge fund analyst we know who follows financials says: “Citi really needs capital, and they realize that cross-selling doesn’t work. Citi realizes that the future of the business is in retail banking.”

This may be true: What incentive do Smith Barney advisors have to sell low-margined Citi checking accounts? And, no doubt more than a few Smith Barney financial advisors are rather furious at Citi for running the brand through the muck in the sub-prime fiasco. Retail client assets (for Citi’s Global Wealth Management unit in North America) declined by 16 percent in the third quarter of 2008 versus the same period a year ago. Smith Barney employs approximately 14,700 financial advisors, who grossed about $9.8 billion in the first three-quarters of 2008.

One the other hand, a joint venture with Morgan Stanley might just be an intermediate step on the way to a full blow merger with Morgan, says Alois Pirker, an analyst with Aite Group, a consultancy. (In its “Top Security and Investments Trends for 2009” report, released yesterday, Aite Group predicted some kind of deal between Citi and Morgan.) Says Pirker: “Ultimately, it’s a big step back for Citi in a way, because BofA and Merrill have moved to that universal model. Wells Fargo and Wachovia have moved toward that model. What is the long-term goal there?”

He continues, “What Morgan needs is deposits. Citi has deposits. Maybe the next step is to combine those two firms. Rumor is that they talked to Goldman first—that is the other firm in a similar position to Morgan. It’s a low-risk structure. The risk is that they would lose Smith Barney, if it can’t buy all of Morgan Stanley. Ultimately, I assume it would develop into a full-blown merger. But I don’t think Citi is in a position at the moment to pull such a thing through. This is like an in-between step.”

Pirker points out that a combined Morgan/Smith Barney would surpass all of its rivals on the brokerage end. But, “on the retail banking side, it would lag. That’s why Citi wanted to buy Wachovia in the first place, to catch up to BofA. The problem that Citi has overall is the low level of integration. It just hasn’t set up a decently integrated shop. Wachovia did a great job at this. Even if you add in Morgan you have to integrate these brokerages. Where in BofA’s case, you have a leader and a lagger—so it’s a pretty easy integration.”

Again, a Citi spokesman declined to comment. But something must be up. One Smith Barney advisor we spoke to got a call early this morning from someone who had a meeting with upper management who said, “Bide your time, something is happening.”

“I was told, hold your breath and wait for it to come,” the advisor says. “We were being shopped before this apparently. I absolutely believe Citigroup has been wanting to sell us for some time.”

Apparently the feeling is mutual. “I think it is good, Citigroup was not a good parent, and we’ve been wanting to get sold ever since I have been here,” says the advisor. From what this broker heard, Citi went to Goldman Sachs at the beginning of the week and got rebuffed, and then it went to Morgan—which was amusing for this broker because Morgan called to recruit him Thursday.

This broker says he will be at work late tonight to call clients to tell them what is happening and keep them updated.

“This will probably be a sigh of relief among the rank and file,” he says. “A number of my friends who are leaving and have actually signed contracts might change their mind now.”

Another Citi advisor says, “I’m not surprised about it—especially when you consider the fact that Citi has been trying to raise capital in a difficult environment. This is hopefully a way for them to do that and unlock some shareholder value.”

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