Citi breakup in sight after Morgan Stanley deal

By Dan Wilchins and Joseph A. Giannone

NEW YORK (Reuters) - Citigroup Inc (C.N) agreed to merge its Smith Barney brokerage with Morgan Stanley's (MS.N) wealth management unit on Tuesday, and is expected to make further asset sales to raise capital and to isolate toxic assets from the rest of the bank.

Citigroup, once the world's largest bank, may announce plans on January 22 to formally shed the "financial supermarket" approach once championed by former Chief Executive Sanford "Sandy" Weill, but which is now being disavowed by Chief Executive Vikram Pandit. It is expected the same day to post a big fourth-quarter loss.

Citigroup is planning to adopt the equivalent of a "good bank, bad bank" structure, in which it would slim down to a business model recalling the former Citicorp, a person familiar with the plan said.

The plan envisions focussing on corporate, investment and retail banking and keeping a slimmer trading business, while moving unwanted assets and businesses such as complex debt to a separate structure, the person said on condition of anonymity.

Citigroup's "bad bank" would have about $600 billion (411 billion pounds) of assets, close to one-third of Citigroup's balance sheet, which could eventually be sold or spun off, the person said.

Assets that could be sold include its Primerica unit, which sells life insurance, mutual funds and other financial products.

Segregating bad assets has a history of success, said Mike Holland, a money manager at Holland & Co in New York. "It worked in the savings and loan crisis (in the 1980s). I'm getting a sense of deja vu, in a good way."

Citigroup declined to comment on its longer-term plans.