Citigroup Faces a Potential $6B Write-Down in Q3 over MSSB Dispute

A ‘win’ for Morgan Stanley (NYSE:MS) currently in a fight with Citigroup Inc. (NYSE:C) over the value of Morgan Stanley Smith Barney (MSSB), their joint retail brokerage unit, could result in a big loss for  Citigroup Inc. (NYSE:C). Morgan Stanley (NYSE:MS) claims that Smith Barney is worth half the valuation which Citigroup Inc. (NYSE:C) has assigned to the division.

Citigroup Faces a Potential $6B Write-Down in Q3 over MSSB Dispute

Morgan Stanley currently owns 51% of  Morgan Stanley (NYSE:MS) Smith Barney (MSSB) claims the division is worth $9 billion. Morgan Stanley is in talks to buy an additional 14% of MSSB from  Citigroup Inc..  Citigroup Inc. which owns the other 49% of the group values MSSB at $22 billion. As a result of the wide range of valuations, MSSB is currently being evaluated by investment bank Perella Weinberg Partners LP.   Perella Weinberg Partners is acting as a third party, because the two valuations differ by over 10%. The announcement was supposed to be made this week but is being pushed off until September 10th. The lower the valuation, the less Morgan Stanley would have to pay for MSSB.

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The states are extremely high for  Citigroup Inc.. Wells Fargo Securities put out a research report today, which estimates that Citigroup could be required to take a massive write down,possibly higher than JPMorgan’s Whale Trade write down of $5.8 billion in the second quarter.  Citigroup Inc. has previously valued its 49% stake at approximately $11B, and simultaneously stated Morgan Stanley had placed a value on MSSB of 40% of that figure, or about $4.4 billion. Analysts expect Citigroup to earn $0.97 a share in the third quarter. If Citigroup’s has a write down of $6 billion, it would equal $1.30 a share.

While the potential pretax writedown of  Citigroup Inc.’s stake could exceed $6B if Morgan Stanley’ valuation is accepted, it  is more likely writedown is in the range of about $4B (before tax) based on current retail broker comps and the MSSB contribution to MS (adjusted for elevated noncore expenses in MSSB) compared to our current estimate of  Citigroup Inc.’s pretax profit of $4.2 billion.

(Disclosure: No position in any securities mentioned in the article)