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Citi to lose $2.9 billion on Smith Barney sale

September 11, 2012: 12:37 PM ET

Since 2009, Morgan Stanley and Citigroup have operated the brokerage firm Smith Barney as a joint venture.

Citigroup said it expects to book an after-tax loss of $2.9 billion from the sale of its remaining 49% stake in Smith Barney to Morgan Stanley.

The disclosure, made in an SEC filing Tuesday afternoon, came after Morgan Stanley and Citigroup disclosed the value of Morgan Stanley Smith Barney, the wealth brokerage unit they had shared since 2009.

At $13.5 billion, the valuation represents a big win for Morgan Stanley, which had valued the business at $9 billion. Citigroup (C) had said it was worth $23 billion. Morgan Stanley (MS) already owned 51% of the joint venture, which will be renamed Morgan Stanley Wealth Management as the firm phases out the Smith Barney brand.

Investment bank Perella Weinberg was called in to mediate and offer its own appraisal, which is what the two firms used to reach a compromise. The valuation paves the way for Morgan Stanley to snap up the remainder of the 17,000 person strong brokerage at favorable pricing.

Morgan Stanley can now move forward with the first phase by buying an additional 14% stake, bringing its total ownership to 65%. The firm plans to acquire the remaining 35% it doesn't own by mid-2015, at the latest.

Citigroup plans to book the $2.9 billion loss ($4.7 billion pre tax), in its third-quarter results, according to the SEC filing.

Related: Morgan Stanley: All grown up

Citigroup tapped Morgan Stanley to buy a stake in Smith Barney in 2009 as it rushed to sell assets to shore up its shaky balance sheet.

Even at a discounted value to what Citi thought the business was worth, the sale of Smith Barney allows CEO Vikram Pandit to rid one item from his "for sale" box. Since the financial crisis, Citigroup has compiled a list of so-called non-core assets that it planned to sell. "Establishing certainty regarding the divestiture of this business is in the best interests of our shareholders," Pandit said in a statement.

Pandit discussed the continuing slim-down of Citigroup, including the Smith Barney sale, during a presentation at a Barclays investor conference Monday. He dubbed the new look of Citigroup: "Simpler, safer, safer and stronger." While the motto doesn't exactly roll off the tongue, the strategy is a clear reversal from Citigroup's pre-crisis ambitions. Smith Barney was one part of what Citigroup's former CEO, Sandy Weill, pieced together to form the largest bank in the world.

Recently, as U.S. government policymakers and bank executives wrestle with defining what constitutes too big to fail, along with a slew of regulatory measures, Weill appeared to change his tune. During a recent CNBC interview, he said large banks should be broken up.

While the acquisition of Smith Barney makes Morgan Stanley look bigger, CEO James Gorman said it also makes it safer and stronger -- a sharp departure from some of the bank's risky lending habits during the pre-financial crisis era. With Smith Barney, Morgan Stanley will gain access to $48 billion of deposits, helping build up its capital ratios to comply with international rules.

Both Citigroup and Morgan Stanley's shares rose more than 2% Tuesday.

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Maureen Farrell
Maureen Farrell
Staff writer, CNNMoney

Maureen Farrell is a staff writer at CNNMoney and covers Wall Street, banking, mergers and the stock and bond markets. Prior to joining CNNMoney, she covered venture capital and entrepreneurs for Forbes, and mergers and bankruptcy for Mergermarket and Debtwire, both divisions of the Financial Times.

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