Think of the children

13 March 2012 By Antony Currie Follow @AntonyMCurrie

The firm led by James Gorman should get Fed approval this week to buy another 14 pct of the stockbroker it owns with Citi. But acquiring it all would make more sense and unlock capital for Citi. Assuming they can agree on price, of course – and convince regulators of the plan.

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The Federal Reserve is set to inform U.S. banks of their stress-test results on March 15, which will determine how they can deploy capital over the next year, whether by reinstating or increasing dividends, buying back stock or other options.

Morgan Stanley hopes to gain approval to increase its 51 percent stake in its wealth management joint venture with Citigroup to 65 percent. It’s the first part of a three-step program to transfer control of the unit to Morgan Stanley by 2014 as envisioned in the agreement the two firms struck in 2009. Morgan Stanley can make a formal offer after May 31.

Citi values its 49 percent stake at $10 billion, a $1 billion drop from last year. Morgan Stanley does not provide its fair value assessment for the division, but analysts estimate the firm carries it at a lower value than Citi.

If the two sides cannot agree on a price, an independent adjudicator will be called in to set a fair value if the higher valuation is more than 10 percent above the lower valuation. If below that threshold, fair value is determined to be the average of the two valuations.

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