Citigroup Inc. (NYSE:C) has communicated an interest in selling the remainder of its Smith Barney stake to its partner, Morgan Stanley (NYSE:MS). Citi CFO John Gerspach and COO John Havens have said they are willing to sell the rest of the bank’s stake instead of the pre-agreed 14% if Morgan Stanley makes a fair offer for it.

As previously agreed upon by the two banks, Morgan Stanley has the option to buy a 14% stake in May which would increase the firm’s ownership to 65%. Also, as previously agreed upon, Morgan Stanley would have the option to outright buy Smith Barney over the next two years. Since 2009, Morgan Stanley has had a controlling stake in the business which has created 17,000 new advisers and $1.65 trillion in assets. If Morgan Stanley agrees to buy the rest of the business ahead of time, they would need to get the deal re-approved by the banking regulators.

I think the best thing here is if Morgan Stanley just bought out the rest of the Smith Barney stake because they have already integrated Smith Barney into their firm and they can handle it much better than Citi can. Right now, Citi needs to focus on raising capital because they were one of four banks that failed the Federal Reserve’s stress test. The stake in Smith Barney does not hold as much value for Citi which is why it is good that they are trying to sell its share.

Citigroup needs to increase its cash reserves which it has not been serious on in the last couple of years. The firm needs to get its act together and start selling off portions of its business to get to a

leaner, more stable banking platform. The bank has been too focused on trying to maintain rather than to cut and increase cash on hand to be able to take on a possible recessionary environment.

Morgan Stanley on the other hand has already passed the stress test and has good cash reserve levels. They are now cleared to go ahead and search for growth or increasing reasonable risk exposure. Morgan Stanley is among the top tier when it comes to US banks which makes it sensible for them to fully control Smith Barney and use that as a platform of growth for wealth management. Bottom line here is Citigroup needs to focus on cash reserves while Morgan Stanley can focus on more efficient operations and advanced business operations.