Citigroup (C), the New York struggling financial giant, which received a massive government bailout, is in talks to unload its brokerage and asset management unit Smith Barney in advance of a dismal fourth-quarter earnings report, people familiar with the situation tell FOX Business.

Citigroup is considering forming a joint venture with Morgan Stanley (MS) that would give Morgan Stanley a 51% stake of Smith Barney. According to Oppenheimer banking analyst Meredith Whitney, that deal would form the biggest brokerage in the world.

No deal has been reached as of yet, but it comes ahead of “the worst earnings report in the history of this company,” sources said.

Reuters is reporting that Citigroup would give up operational and strategic control of Smith Barney, and Morgan Stanley would buy the rest of Smith Barney over the next three to five years.

Sources told FOX Business that Citigroup CEO Vikram Pandit is fighting to keep the bank together, but since it’s in dire need of cash, a breakup may be inevitable. This would undo the legacy of superstar Citigroup CEO Sandy Weill, who molded Citi into the largest bank by market capitalization in the world.

Sources revealed that the second assistance event for Citigroup became necessary when the stock fell to $3.77 in November, putting the U.S.’s initial $25 billion investment far underwater. Treasury decided to step in with a second step of assistance to protect its initial investment and attempt to avoid voter outrage. The government is now backstopping $306 billion in residential and commercial mortgage loans and securities.

In addition to the backstop role, the government needs Citigroup to survive, at least in some form, because it is a primary dealer in U.S. Treasury securities.

Also, these developments indicate that Citigroup may need to merge in order to survive -- but few financial institutions are big enough and healthy enough to fill that role. Bank of America (BAC), for instance, has the size, but is still absorbing its acquisitions of Merrill Lynch and Countrywide Financial.

Potential suitors could include JPMorgan Chase (JPM) or Wells Fargo (WFC), both of which have made large acquisitions recently but may be willing to make a deal on certain terms.

Citigroup wasn’t available to comment. Morgan Stanley wasn't immediately available to comment.

The Wall Street Journal reported Citigroup could unload other assets including Grupo Financiero Banamex SA, its retail-banking business in Mexico. That might appeal to JPMorgan Chase, which doesn’t have any international retail operations.

Also on Friday, Citigroup announced Robert Rubin, one of its highest-profile executives, resigned as senior counselor.

Sources at Citi say there’s widespread relief, from secretaries to higher-ups, at the departure of Rubin, who earned $115 million in non-stock compensation since 1999 for his work at the bank.

Rubin, who joined Citi in 1999 after serving as Treasury secretary, resigned effective immediately and will not stand reelection for his position as director. Rubin has received heavy criticism over his role at the financial conglomerate that has lost $20 million over the past year.

"This is not a decision that I have come to lightly," Rubin said in a press release. "But as I enter my 70s and with all that is now in place at Citi, I believe the time has come for me to make these changes."

Rubin is said by sources to be chastened, tired and exhausted -- and wants out now in an attempt to protect his legacy. It remains to be seen whether it’s too late for that, as the bank has already lost 90% of its market value since the 2006 peak of the housing bubble.

Rubin said he would forfeit any bonus that’s due to him, but he will still get his exit pay, according to sources.

Citi's stock, which has lost roughly three-quarters of its value over the past 12 months, extended its losses when the news broke Friday afternoon.

--Joanna Ossinger contributed to this article.