Citigroup Moving to Shed Smith Barney Brokerage

Morgan Stanley and Citigroup are deep in talks to merge their brokerage operations in a deal that could ultimately lead to Morgan Stanley taking over Citi's Smith Barney unit, according to people familiar with the situation.

Mary Altaffer / AP

The deal would be structured as a joint venture, but would involve a payment from Morgan Stanley to Citi of an undisclosed sum that would give Morgan the larger stake in the venture.

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Morgan Stanley would have the right over a period of years to increase its stake in the joint venture and ultimately buy all of it, according to sources.

The move would combine Morgan's brokerage unit, with 8,000 brokers, and Smith Barney, which has 11,000 brokers. It would create the nation's largest single brokerage, surpassing Bank of America's newly acquired Merrill Lynch unit, which has 16,000 brokers.

News of the potential deal broke shortly after Citigroup announced that board member Robert Rubin, the former U.S. Treasury secretary, has resigned as a senior adviser to the big financial services company.

The bank says Rubin will continue to serve as a director until his term expires at the next annual meeting in the spring.

Citigroup's stock has tanked in recent months on concerns that mounting losses from credit cards, mortgages and toxic debt could overwhelm its efforts to slash costs and add deposits.

Last month,the banking giant received a second, $20 billion injection of capital from the Wall Street bailout fund as well as federal government promises to cover more than $300 billion of the bank's exposure to toxic mortgage-backed securities

Investor fears about Citigroup's balance sheet last month sparked a run on Citigroup's stock that sent shares reeling to close to $3, before recovering to just above $6 following the bailout from the government.

Meanwhile, speculation has been growing that Citigroup would eventually have to merge with another financial institution or sell off assets, including Smith Barney. But senior management, including CEO Vikram Pandit, have consistently denied that Smith Barney was for sale.

—CNBC's Charlie Gasparino contributed to this report.

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