Morgan Stanley Bulls Could Get Gored by Citigroup Deal

To Hintz's point about defections, BofA already has shown signs of trouble in retaining key Merrill Lynch talent, just days after the deal closed. Robert McCann, the head of Merrill's retail business, resigned last week, followed shortly thereafter by Gregory Fleming, who had been the No. 2 executive at Merrill.

The Merrill acquisition made BofA the nation's largest retail broker, but a combined Morgan Stanley-Smith Barney would eclipse it in terms of the number of advisors. Cutbacks and post-merger defections, however, will presumably shrink everyone's staffing levels considerably.

Standard &Poor's equity analyst Matt Albrecht says annual revenues for a combined Morgan Stanley-Smith Barney would be $19 billion, compared to $14 billion for the joined Bank of America-Merrill Lynch, projecting fourth quarter 2007 figures over a full year. He also thinks Morgan Stanley would see fewer defections than he expects for BofA because he believes the culture is better aligned with Smith Barney than BofA's is with Merrill.

Aside from a slowing business, one other concern brokers may have in the market downturn is backlash from angry clients. Investors have lost lots of money over the past year and are more likely to be suing their brokers than sending new business their way.

Tom Brown, head of financial services hedge fund Second Curve Capital, says the brokerage business should improve as the economy does.

"The fact is that there are a lot of unhappy investors in the world today that will come back and be investors in the future," he says.

Brown likes the deal because he assumes Citigroup will be making major concessions due to its dire financial condition. "I like when companies are selling out of desperation," Brown says. Second Curve owns Morgan Stanley shares and has no position in Citigroup.

It could not be determined whether Morgan Stanley might be on the hook for future lawsuits against brokers at Smith Barney, if the unconfirmed deal happens. A call to a Morgan Stanley spokesman was not returned and a Citigroup spokesman declined to comment.

Morgan Stanley shares soared nearly 10% to $20.95 early on Monday, but closed down 1.4% to $18.79 amid a wider market selloff.