Can Citigroup Survive Without Smith Barney-Morgan Stanley Merger?

Citigroup’s bailout deal was struck over a weekend in November. Just two months later, I thought this past weekend would reveal yet another big deal involving Citigroup. I may be a day or two off, but something is definitely cooking!

Sources told Bloomberg that Morgan Stanley (Ticker: MS) is negotiating with Citigroup (Ticker: C) to purchase a majority stake in Citi’s brokerage arm, Smith Barney.

According to the source, Morgan Stanley would pay cash for a 51 percent stake in a joint venture of the firms’ brokerage units. An AP source said the deal would lead Citi to a gain in the neighborhood of $5 billion after taxes. Morgan Stanley would maintain the right to eventually buy 100 percent of the new venture.

On Friday evening’s edition of Fast Money, I watched trader Jon Najarian (code name: Doctor J) tell host Dylan Ratigan that the government must have forced Citi into this deal. According to Najarian, Smith Barney was a cash cow, as such it would make no sense for Citi to let it go voluntarily.

At first, I wondered what the government had to do with this. Hmmmm…

Citigroup has already received $45 billion in bailout money! Then, I had a big “Duuuhhhh?!?!?” moment. How could I forget about that? There are so many billions flying around, sometimes I just can’t keep up with them. I heard the Treasury is having the same problem.

Anyway, I imagine the government wants Citigroup to get as much cash on the books as possible from non-government sources so as to avoid yet another round of bailout disbursements. If Citi is still having trouble after receiving a $45 billion injection I know everyone has to be wondering: how much money will it take?

From the looks of Citigroup’s shares, this deal may not be enough. Today, shares of Citigroup dropped below $6 per share. This equates to a 15 percent loss today and an 80 percent loss over the past year. For a frame of reference on Citi’s pricing, take a look at the two-year chart for Citi.

So can Citi survive without the merger? I would venture to say yes, but with new management and more bailout money.

(Image source: Picapp)