Updated from Friday, Jan. 9

Former Treasury Secretary Robert Rubin's departure at

Citigroup

(C) - Get Report

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) - Get Report

, 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.

Rumors floated late last year that

Citi

, in a bid to raise additional capital, was looking to offload certain assets and business units. Smith Barney is one attractive asset, but the bank has expressed reluctance to parting with it.

Rubin joined Citi in 1999 after serving as Treasury Secretary under President Clinton. He will remain a director until Citi's annual meeting in April. In the bank's statement, he said he intended to "deepen his involvement in outside activities and organizations to which he has been strongly committed."

"This is not a decision that I have come to lightly," Rubin said in the statement. "But as I enter my 70s and with all that is now in place at Citi, I believe the time has come for me to make these changes."

Richard Ferlauto, the director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees, or AFSCME, says Rubin's resignation opens the door for "new needed blood onto the board." AFSCME is an investor in Citi.

"The most important thing for Citi right now is to rebuild itself from the bottom up," Ferlauto says. The company needs "a whole set of directors who have a different vision for the company."

Ferlauto adds that the new board members should have "significant retail experience," who understand international banking and "have a sense of how to do effective M&A," he says.

Rubin's resignation comes as analysts brace for yet another quarterly loss recorded in the fourth quarter by the banking titan as credit reserve builds keep rising and writedowns continue.

The company announced late Thursday that its direct exposure to troubled chemical maker LyondellBasell was approximately $2 billion. The Netherlands-based company filed for Chapter 11 bankruptcy earlier this week. Citi said it would take a charge of around $1.4 billion recorded as a loan loss provision.

Schutz says that a joint venture of Morgan's and Citi's brokerages would "make a ton of sense."

Companies are in "cost-cutting mode," he says. This is not "a revenue story, it's a cost-cutting one," and both companies would benefit, while Citi would get to retain the value of its Smith Barney unit.

He likened the deal to

Wachovia's

joint venture with Prudential Securities. Wachovia was recently acquired by

Wells Fargo

(WFC) - Get Report

.

Citi shares closed down 5.7% to $6.75 Friday.