The breakup of US banking powerhouse Citigroup moved a step closer, and Britain took control of a big stake in another top lender on Monday as the reshaping of the global financial landscape gathered pace. Citigroup moved close to a deal to join its Smith Barney business with Morgan Stanley's brokerage operation, people familiar with the matter said. The move would create the largest retail brokerage and mark the boldest step in dismantling what was the world's biggest financial services conglomerate. The financial services sector is in a state of constant flux as banks recoil under the threat of a long and deep downturn, with governments bailing out the worst-hit lenders while relatively strong banks look for bargain acquisitions. Britain found itself with another stake in a top bank after investors in Lloyds TSB and its takeover target HBOS shunned a pair of rights issues, leaving the government to supply almost all of the 17 billion pounds they need to rebuild capital. “The landscape is going to change, and it's unlikely that large banks can go into government hands and come out the other side unchanged,” said Simon Maughan, analyst at MF Global in London. “Whether it's the US government with Citi, the Swiss with UBS or the UK with Royal Bank of Scotland, governments are going to say, ‘You are very big institutions to be bailed out, and it would be good if you were a degree smaller and much more manageable',” he added. Britain will get a 43.4 percent stake in Lloyds Banking Group, the enlarged bank to be formed this week, adding to the 58 percent holding it took in RBS last month. Citigroup Inc.'s stock sank Monday to its lowest levels since November as investors wondered how much more cash the troubled bank will need. Citigroup Inc., in an effort to raise capital, is hammering out a deal to sell the bulk of its retail brokerage to Morgan Stanley. The joint venture – expected to be announced later this week – would lead to an after-tax gain for Citigroup of about $5 to $6 billion, a person close to the negotiations said Monday. The person spoke on condition of anonymity because he was not authorized to discuss the ongoing talks. But maintaining cash levels that are high enough to make up for upcoming loan losses remains a big challenge for Citigroup. Citigroup stock fell $1.15, or 17 percent, to $5.60 Monday – making it by far the steepest decliner among the 30 stocks that make up the Dow Jones industrial average – even though many industry analysts were positive about the deal. Citigroup lost more than $20 billion between October 2007 and October 2008, and is expected to post another deficit for the final quarter of last year when it reports those results next week. The government has already loaned Citigroup $45 billion, and agreed to absorb the losses.
