Morgan Stanley announced that it will buy the remaining wealth management joint venture with Citigroup by the end of June. This would complete the deal started during the financial crisis that was made to stabilize both companies.
Morgan Stanley will buy the remaining 35 percent stake of Citigroup in the joint venture for $4.7 billion that was set up by the two financial institutions in 2009. It is also paying around $2 billion to get Citigroup’s preferred securities.
Morgan Stanley Chief Executive James Gorman said that the deal has given investors more assurance about the bank’s business model. It gives the bank a reliable source of income from wealth management that offset the volatility in investment banking and trading.
Gorman wanted to expand the bank’s retail brokerage business since 2006, when he became the company’s chief operating officer for wealth management. He determined whether Morgan Stanley should fix its wealth management group or dispose it. He told then-chief executive John Mack that the wealth management group could earn profit margins of 20 percent or more, which was 10 times its profit margins at that time.
Gorman’s prediction had a condition, which was to become profitable, the wealth management business must be more efficient and double its size by acquiring a large competitor, such as UBS’ wealth management unit or Citigroup’s Smith Barney.
Mack was more focused on improving bond trading at that time. Morgan Stanley was behind from its rivals in Wall Street. In an absence of an acquisition, Gorman started fixing the wealth business through cost cutting measures.
Then on January 2009, Morgan Stanley and Citigroup announced an agreement that would make Morgan Stanley the owner of Smith Barney. The deal was made to give extra capital to Citigroup and give Morgan Stanley a stable source of revenue after it got $9.4 billion losses on mortgage investments.