NEW YORK (TheStreet) -- It's time for Citigroup (C) to pay for some of the advantages of the Morgan Stanley Smith Barney joint venture that was created in 2009, but investors should take it in stride.
September 10th is a key date for Citigroup's shareholders, because that is the new deadline by which the company and Morgan Stanley (MS) are required to agree on the value of Citigroup's 49% stake in the joint venture, which is likely to lead to a major write-down for Citi.
In June 2009 -- a time when Citigroup badly needed to shore up its capital in the wake of credit losses -- the company sold its Smith Barney subsidiary to the new Morgan Stanley Smith Barney Joint Venture (MSSB), with Morgan Stanley taking a 51% stake in the joint venture, while Citigroup kept 49%. Citigroup booked a gain of $11.1 billion, or $6.7 billion after taxes, on the deal, which partially offset a huge provision for loan losses of $12.2 billion, feeding a second-quarter 2009 profit of $4.3 billion, while helping to grow the company's tangible common equity by $9.1 during from the previous quarter.
There can be no doubt that Citigroup was very happy with the joint venture at the time, and that bank regulators were thrilled, seeing one of the nation's largest banks prop up its capital base so significantly, at the height of the credit mess.Morgan Stanley was left with options to purchase Citigroup's stake in the joint venture over a three-year period, beginning in 2012. Morgan Stanley in May announced plans to purchase an additional 14% stake in the joint venture, subject to a valuation that was to be determined over a 90-day period, which was extended until Sept. 10, since Citigroup and Morgan Stanley don't agree on MSSB's value. Citigroup disclosed in July that it was carrying its 49% stake in the joint venture at roughly $11 billion, but KBW analyst David Konrad in July said that "Citi's submitted valuation is slightly above its carry value, which we believe implies an approximately $23 billion valuation for the entire JV." In other words, JPMorgan values Citi's stake at just $9.2 billion, which is why the two companies are relying on a third-party appraisal of MSSB's worth.
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