Rubin resigns with Citigroup in disarray

Robert E. Rubin, the former Treasury secretary who advised Citigroup Inc. as it lost $20 billion in the subprime mortgage crisis, resigned his position as senior counselor and won’t stand for reelection to the board.

Rubin, 70, intends to “deepen his involvement in outside activities and organizations to which he has been strongly committed,” the New York-based bank said Friday in a statement.

Separately, Citigroup and Morgan Stanley are in talks to merge their brokerage units, a person familiar with the matter said.

“My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today,” Rubin said in a letter to Chief Executive Vikram Pandit.

Rubin, who served at the Treasury’s helm from 1995 to 1999 under President Clinton, has faced criticism from investors, including Smith Asset Management’s William Smith, for collecting more than $150 million in pay in a decade while failing to steer Citigroup away from subprime mortgage securities. The investments led to four straight quarterly losses and prompted the bank to turn to the government for a rescue package.

Citigroup, the biggest bank recipient of U.S. bailout funds, completed an agreement for a $20-billion government investment, on top of an earlier $25-billion injection and a U.S. guarantee on $306 billion in troubled assets.

Rubin’s departure is “not a huge surprise,” said Michael Holland, chairman and founder of New York-based Holland & Co., which oversees $4 billion. “It’s been a challenged situation for a long period of time.”

Pandit, 51, is cutting 52,000 jobs worldwide and expects “major challenges” to continue into 2009, he said Dec. 31.

Citigroup’s 77% stock price decline in 2008 made it the worst performer in the 24-company KBW bank index for the second year in a row. The shares fell 41 cents, or 5.7%, to $6.75 on Friday.

Citigroup and Morgan Stanley are in talks to form a joint venture that would combine the brokerage units of both banks and give Morgan Stanley a 51% stake, the person familiar with the matter said.

An agreement may be announced as soon as Sunday, said the person, who declined to be identified because the deal isn’t complete. Morgan Stanley would pay cash for control of the venture and would have an option to increase its ownership to as much as 100% in the coming years, the person said.