Citi & Morgan Swap Cash For Power

Continuing the narrative that major U.S. banks have plenty of heavy lifting ahead of them, this morning Citigroup (C) and Morgan Stanley (MS) announced the combining of brokerage operations that may facilitate a fresh wave of consolidation in the finance industry, according to an AP report today.

The deal involves the brokerage firm of Smith Barney (you know, they made their money the old-fashioned way — they got a government bailout), of which 51% will be sold to Morgan Stanley for reportedly $2-3 billion. This would bring Citigroup the cash it seriously needs and give Morgan Stanley more power in its brokerage operations. Following the collapse of Lehman Brothers last autumn, Morgan Stanley and Goldman Sachs (GS) were granted federal approval to convert their businesses to bank holding companies.

Clearly, traders see this as a better development for Morgan Stanley than for Citigroup. Shares of MS are up 4% to around the $20 per share mark, while C shares have fallen 11.5% from already low levels to under $6 per share.

Both firms continue to see heavy downward estimate revision pressure from analysts, as well. In the past 30 days, 10 analysts have lowered expectations for Morgan Stanley in fiscal 2009 (ending November ‘09), and Citigroup’s fiscal 2009 (ending December) is expected to fetch a mere 12 cents per share.

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