Citi cedes Smith Barney to Morgan Stanley

Vikram Pandit is unraveling his empire to save his bank. Citigroup Inc’s chief executive officer said on Tuesday that he would cede control of the Smith Barney brokerage to Morgan Stanley. Pandit may also dump the CitiFinancial consumer-lending unit, tag Tokyo-based Nikko Asset Management Co for eventual sale and rein in trading with the bank’s own capital, people familiar with the matter said.

Pandit, who turned 52 on Wednesday, spent 13 months on the job trying to integrate a New York-based behemoth assembled by predecessors Sanford “Sandy” Weill and Charles O “Chuck” Prince. Yet he incurred $20 billion of net losses and was forced to accept $45 billion of rescue funds from the US government. Now, he’s slicing off divisions of a company he described six months ago as “a truly global universal bank.”

The financial-supermarket model “was never going to work,” said Bill Smith, founder of Citigroup shareholder Smith Asset Management Inc in New York, who has repeatedly called for a breakup. “You had three management teams that all failed to integrate this. You will not recognize this company within 12 months.”

The bank’s remaining parts will include branch banking, advising on mergers, underwriting securities, processing payments, corporate lending and handling trades for clients, the people said. Citigroup will keep its international reach, maintaining the “globality” that Pandit said last year was the bank’s defining strength. Pandit wasn’t available to comment.

“It will be a much more manageable business,” Marshall Front, chairman of Chicago-based Front Barnett Associates LLC, said in a Bloomberg TV interview on Tuesday.

The bank, scheduled to report fourth-quarter results next week, will probably say it lost $2.6 billion, according to the average estimate of six analysts surveyed by Bloomberg. Oppenheimer & Co analyst Meredith Whitney estimated in a November 24 note to clients that Citigroup may have a $12.4 billion net loss in 2009.

Citigroup traces its history to 1812, with the founding of the City Bank of New York. Its current incarnation took shape in 1998 with the $37.4 billion merger of Travelers Group Inc, led by Weill, and John Reed’s Citicorp Travellers, which owned brokerage Smith Barney Holdings Inc, had a year earlier paid about $9 billion for Salomon Inc, the parent of Salomon Brothers Inc, to form Salomon Smith Barney Inc.