Rubin Exits Citi, as Bank Talks to Morgan

Updated from Friday, Jan. 9

Former Treasury Secretary Robert Rubin's departure at Citigroup (C Quote) could pave the way for more board members to leave, as the battered bank mulls the possible sale of its Smith Barney brokerage and other big changes.

Rubin has come under fire over the past two months for his role in encouraging the New York bank's foray into toxic debt that has laid waste to its balance sheet. The banks problems forced it to accept a $45 billion government bailout and left it contemplating a breakup of the financial supermarket model developed by former Chairman and CEO Sandy Weill a decade ago.

Reports surfaced late Friday that Citi is contemplating a sale of Smith Barney, its 11,000 financial adviser-strong brokerage.

Morgan Stanley (MS Quote), is likely to pay Citigroup between $2 billion and $3 billion for a 51% in Smith Barney, the Associated Press reports, citing a person close to the negotiations. Bloomberg reports Citigroup could book a pretax gain of as much as $10 billion by selling control of the brokerage.

Morgan Stanley would then have the option to buy the rest of Smith Barney over the next three to five years, AP reports.

A spokesman for Citigroup declined to comment on Sunday. Calls to Morgan Stanley weren't immediately returned, according to AP.

Published reports have the deal being announced some time this week.

The problems at Citi "all happened under [Rubin's] watch," says Anton Schutz, president of Mendon Capital Advisors and the fund manager to Burnham Financial Services. While Citi over the past year has shaken up its executive management, "we really have not seen a revamping of the board."

"This is a start," Schutz says. "He is the first to go, but I am not sure the last."

In a letter to Citi CEO Vikram Pandit on Friday, Rubin said that he was leaving his role as senior counselor effective immediately and will not stand for re-election to its board of directors, the company said.

A crisis of confidence in the bank led to a swoon in its share price late last year, before the federal government bailed it out with an additional $20 billion preferred equity investment made on top of the $25 billion stake it had taken through the Troubled Assets Relief Program in October. The government also guaranteed $306 billion in illiquid assets against further losses.

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