Citigroup, Morgan Partner on Smith Barney

Updated from 5:15 p.m. EST

Citigroup (C Quote) and Morgan Stanley (MS Quote) on Thursday said they would combine brokerage operations in a new joint venture to be called Morgan Stanley Smith Barney.

The announcement culminates three days of speculation about a deal, which creates the world's largest brokerage operation, with 20,000 advisers managing $1.7 trillion in client assets for 6.8 million households. Morgan Stanley will pay $2.7 billion for a 51% stake in the combined business, allowing it better to compete with a newly merged Bank of America (BAC Quote) and Merrill Lynch.

"This joint venture is an important step forward in our effort to build our wealth management franchise, which we believe will be an increasingly important and profitable part of Morgan Stanley's business in the years ahead," Morgan Stanley Chairman and CEO John Mack said in a statement.

For Citi, the deal provides a much needed cash boost, as it prepares to report what is expected to be a big fourth-quarter loss. Citi said the deal provides a pre-tax gain of approximately $9.5 billion, about $5.8 billion after taxes, and will create approximately $6.5 billion of tangible common equity.

"We will own 49% of this leading wealth management business and will continue to participate in its earnings and growth," Citi CEO Vikram Pandit said in the statement. "In addition, we will generate equity capital that we can deploy to other core businesses which are well positioned to deliver attractive returns in the future. Citi and its clients will maintain access to the industry's leading wealth management platform for capital markets transactions."