Citigroup was in talks last night to sell a majority stake in Smith Barney, the brokerage firm, to Morgan Stanley in a deal that would create the world’s biggest wealth manager.

The negotiations came to light as Robert Rubin, the former US Treasury Secretary, resigned as senior counsellor and director of Citigroup after months of criticism for his role in leading what was once the world’s largest bank to the brink of collapse.

Under the deal being discussed by Morgan Stanley and Citigroup, 51 per cent of Smith Barney will be sold to Morgan Stanley with an option to buy the rest of the business within five years. Morgan Stanley declined to comment on the talks and Citigroup did not respond to requests for comment. It was not clear last night how much the deal would cost Morgan Stanley.

The banks are expected to work through the weekend to finalise the terms of the deal. The merger would help Morgan Stanley, which converted to a bank holding company last year and subsequently received $10 billion (£6.6 billion) in Government aid, to diversify.

Citigroup, which has taken $45 billion in government funding, is likely to welcome the additional capital that the deal would provide. The move is also in line with the strategy of Vikram Pandit, the Citigroup chief executive, to downsize the business after the sub-prime debacle. Citigroup is dismissing 52,000 of its workers after it made $20 billion in credit-related losses.

The bank announced the resignation of Mr Rubin, who was Treasury Secretary from 1995 to 1999, yesterday. In a letter to Mr Pandit, Mr Rubin said: “My great regret is that I and so many of us who have been involved in this industry for so long did not recognise the serious possibility of the extreme circumstances that the financial system faces today.”

Mr Rubin, who joined Citigroup in 1999, has been excoriated in the press as the force behind the bank’s decision to chase profits by pushing into risky credit-related products. His duties at the bank, other than using his network to attract clients, were not clear, but insiders said that his influence was pervasive. In his time at Citigroup, Mr Rubin collected about $150 million in remuneration.

Before becoming Treasury Secretary, Mr Rubin, who is a graduate of Harvard and Yale Law School, had a long career at Goldman Sachs, where he started on the arbitrage trading desk and worked his way up to become co-chairman of the elite bank.

Shares in Citigroup closed in New York at $6.75, down by 5.7 per cent.

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