Unloading its Smith Barney brokerage unit could be the first step of a major, government-forced breakup of Citigroup Inc.

"Citigroup could be radically smaller" within a few years "as it pulls away from the whole global concept," Joseph Battipaglia, the chief investment officer at Stifel Financial Corp.'s Ryan Beck & Co. Inc., said in an interview Monday. "Smith Barney will be the first of many. Citigroup has to do what it can to hang on for dear life, for now."

Investors sold off Citi shares Monday in anticipation of a massive fourth-quarter loss, its fifth in as many quarters, to be reported Jan. 22.

A breakup could help Citi rivals — JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. — as they fill the resulting vacuum.

"It creates more and more opportunity for JPMorgan, Bank of America, and others," Steven Hovde, chief executive officer and director of investment banking operations at Hovde Financial Inc. in Washington, said in an interview. "It would simply remove a major competitor."

Jefferson Harralson, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., agreed with that assessment, to a point.

"Looking near term, a bank as big as Citi running into major issues is not good news for anybody, because other banks will share in counterparty risk," he said. "Looking out longer, there are businesses that Bank of America, for example, competes head to head with Citi, and a Bank of America would see big opportunities for gains in market share — in mortgages, possibly in cards, possibly in commercial lending, possibly in just about any business each is in."

Neither Citi nor Morgan Stanley would discuss the matter. Citi could seal a deal by midweek to break off Smith Barney as a joint enterprise with Morgan Stanley.

A person familiar with Citi's plans said such an arrangement would free up about $6 billion of capital and give Citi an up-front cash payment of more than $2.5 billion. He emphasized that it would not be an outright sale, and that Citi was "not exiting the business."

Citi is expected to keep a 49% stake in the business, after selling 51% to Morgan Stanley.

The Citi source said the deal would not signal plans to rapidly unload assets; rather, it would simply be a way to create a stronger brokerage business for both Citi and Morgan Stanley. "Anybody that suggests … [Citi] is going to engage in a fire sale of assets is crazy."

But several sources said Citi could put CitiFinancial, Primerica, its international retail brokerage operations, and its private-label credit-card businesses on the block soon. Analysts said it appears that regulators have begun to force a rapid downsizing of the New York company.

"The playbook being followed has the heavy hand of regulators controlling it," Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets Corp., said in an interview. "The people inside Citi probably don't like it, but regulators can be, and are being, very demanding." A smaller Citi would have to focus more on its U.S. retail banking operation, ramping up deposits to fund growth, Mr. Cassidy said. The trouble is that Citi does not have the wherewithal to make deals that would help it boost deposits quickly, he said, and that is what it would need to compete with its U.S. rivals.

Mr. Battipaglia said Citi's retail operation could get carved up and sold off in pieces.

Karen Shaw Petrou, managing director of Federal Financial Analytics Inc., said a move to break up Citi would be the death knell for the financial supermarket bank model promoted by Sanford Weill, its former CEO. It's "another indication that the strategic value of the oligarch bank model was never proven," she said. "Under current market conditions, it clearly does not work."

In an interview last month, Gary Crittenden, Citi's finance chief, said it was cutting costs — shedding 53,000 jobs — but he said it had no intention of abandoning its global model.

Government investments in Citi late last year bought it time to carry out cost-cutting efforts and potentially look at acquisitions that would boost its domestic deposits, giving it an inexpensive funding source to ride out the recession, he said.

But several analysts said that Citi has grown increasingly vulnerable to economic pressures since Wells outbid the $2.1 trillion-asset company for Wachovia Corp. in November — a deal that would have tripled Citi's U.S. deposit base — and that it could quickly eat through the $45 billion of taxpayer infusions after reporting what most analysts expect to be a massive fourth-quarter loss.

The Wall Street Journal reported Monday that Richard Parsons, a Citi director, is expected to be named its chairman soon, succeeding Sir Win Bischoff, and that several directors may step down before the company's annual meeting in April.

Mr. Parsons expressed support for Vikram Pandit, the current CEO, and some analysts said privately that Mr. Pandit, given his investment banking background, could be a good architect for a downsizing.

However, several observers said Mr. Pandit, who has held the job for 13 months, is not safe, simply because disgruntled investors will want heads to roll. "Frankly, I'm surprised he's gone this far," Mr. Battipaglia said.

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