Citigroup Agrees To Repay $20 Bil TARP Funds

Citigroup to repay $20 Bil in TARP Funds.

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Citigroup Says It Has Reached a Deal to Repay Bailout Funds



Citigroup reached a deal early Monday morning to be the last of the big Wall Street banks to exit the government’s bailout program, after persuading regulators that it was sound enough to stand on its own.

Citigroup executives announced a broad program that will replace the $20 billion of remaining federal aid with funds from private investors, facilitate the sale of the government’s $25 billion stock investment and begin to wean itself off other forms of government assistance.

To help replenish its coffers, Citigroup expects to raise about $17 billion by selling stock as early as this week and issue another $4.2 billion in so-called tangible equity units and subordinated notes. The moves aim assuage regulators’ concerns about the bank’s ability to weather another severe economic downturn without returning to the government for more money.

“We are pleased to be able to repay the U.S. government’s trust preferred securities and to terminate the loss-sharing agreement,” the chief executive, Vikram S. Pandit, said in a statement. “We owe the American taxpayers a debt of gratitude.”

With its regulators’ permission, Citigroup plans to redeem $20 billion of preferred stock that the government received as part of the bank’s first two rescues late last year. It will also end a loss-sharing agreement with the government on about $250 billion of troubled real estate and credit card assets.

The Treasury Department, meanwhile, plans to wind down its 34 percent ownership stake in Citigroup, which it acquired by converting $25 billion of preferred shares into common stock in a third rescue this year. It expected to sell its nearly 7.7 billion shares through a series of large stock sales to institutional investors over the next 6 to 12 months. The first sale, for up to $5 billion of Citigroup shares, is expected to occur alongside the this week’s $17 billion stock offering.

The announcement came as President Obama prepared to meet with the chiefs of the nation’s biggest banks at the White House and press them to help speed the economic recovery by providing more loans to small businesses and homeowners.

The president, who has faced criticism from Democrats and Republicans alike for being too close to Wall Street, called Citigroup, Goldman Sachs and 10 other big banks to the gathering as anger over last year’s bank bailouts continued to percolate. Mr. Obama will address the size of salaries and bonuses, an official said, as he seeks to impress upon bankers that they have a “special responsibility” to consumers.

“We have to get them off the sidelines and get them to play a more active role in our economic recovery,” Rahm Emanuel, the White House chief of staff, said in an interview on Sunday. “They play an essential role in helping the economy grow.”

As banks prepare to issue another round of hefty bonuses, White House officials renewed their harsh tone against Wall Street on Sunday. In an interview on “60 Minutes” on CBS, Mr. Obama chided “fat cat bankers” for increasing their own pay as average Americans struggled to recover.

Lawrence H. Summers, the White House chief economic adviser, said on “This Week” on ABC that bankers “need to recognize that they’ve got obligations to the country after all that’s been done for them, and there is a lot more they can do.”

Indeed, if the government approves Citigroup’s repayment of taxpayer funds, it would free it from pay restrictions for banks that received multiple bailouts. And with most of the nation’s biggest lenders out of the bailout program, the president may soon lose some of his leverage over the banks.

The White House has pointed to banks’ repayment as proof that the bailouts helped the financial system recover from near disaster, but it wants the banks to help get the economy moving by lending more to companies to create jobs and to consumers in danger of losing their homes to foreclosure.

Including Citigroup, bailed-out banks will have returned at least $136 billion, or more than half the $245 billion in bailout money extended this year — far faster than anticipated. Of course, the government still has tens of billions of dollars at stake with companies like the American International Group and General Motors.

The negotiations between Citigroup and regulators come just over a week after the government allowed its troubled rival Bank of America to repay its bailout money and underscore just how quickly confidence has returned to the financial markets.

That improvement holds the key to Citigroup’s payback plan, as private investors replace $45 billion of taxpayer funds and as the bank weans itself off additional forms of government assistance.

But Citigroup’s troubles, and those of other banks, are far from over. Some analysts believe the banks are too weak to repay the taxpayer money. If the government allows banks to deplete their capital levels too soon, they argue, they may be setting the stage for another crisis.

For Citigroup, a repayment could help it shed the stigma of having accepted bailout cash. But in some ways, it may be a hollow victory for Mr. Pandit.

With the redemption of the $20 billion of preferred shares, Citigroup will cease being subject to the harsher rules imposed by the federal pay czar at the beginning of 2010. However, the will fall under a set of looser compensation restrictions outlined in the economic stimulus bill until the government sells its entire ownership stake. Still, Citigroup’s troubles are far from over. And in some way, the deal may be a hollow victory for Mr. Pandit since it is unlikely to hasten the bank’s rapid return to financial health. In fact, it has already proved costly to its existing shareholders in the short term.

The moves will result in a pre-tax loss of $2.1 billion that will likely be taken in the fourth quarter, and the new stock offering will severely dilute erode the value of existing shareholders.

And once the repayment deal is completed, it will still take several more years to clean up the financial carnage. Citigroup has not posted a substantial profit in seven quarters, and the bank is expected to muddle through most of 2010 amid another wave of mortgage and credit card losses. And, like several big rivals, the bank continues to lean heavily on government support through a debt guarantee program that makes taxpayers liable if it is unable to pay back the loans.

Indeed, some analysts question whether the bank is still too weak to stand on its own. If the government allows banks to deplete their capital levels too soon, they argue, they may be setting the stage for another crisis.

Citigroup, however, maintains that the bank have among the highest cash and capital reserves in the industry, although its Tier 1 capital ratio— one indicator of financial strength — will fall to 11 percent from 12.8 percent after severs its ties with the government.

Beyond the $17 billion stock offering, Citigroup plans to issue $3.5 billion of so-called tangible equity units and $700 million in subordinated debt. The bank also told its regulators that it may issue up to $3 billion of new trust preferred securities in the first quarter of 2010.

“We planned to exit TARP only when we were convinced it was prudent to do so,” Mr. Pandit said in a statement. “Citi is among the strongest banks in the industry, and we are in a position to support the economic recovery.

Even so, regulators remained deeply concerned about the bank’s financial condition throughout the talks. After Bank of America received permission to exit the bailout program early this month, Citigroup officials redoubled their efforts to sever ties with Washington. Much of the discussion centered on how much additional capital Citigroup would need to replenish its coffers after the government’s exit.

Citigroup argued it should have to raise only $15 billion more, an amount that would reduce the bank’s current capital levels and still leave it with a bigger cushion than its competitors. But federal officials were split over whether that was enough.

Treasury and some Federal Reserve officials felt more comfortable with around that amount. But officials from the Federal Deposit Insurance Corporation, which has testy relations with Citigroup and deeper financial exposure, demanded the bank hold more capital.

Tensions have been running high as Citigroup and its regulators crammed a process that had taken months into a little more than a week of marathon discussions. If Citigroup does not reach a deal by Tuesday, bank officials fear it would be hard to pull off a big stock offering until next year, because many big investors leave for the holiday vacation.

The regulators’ decision is likely to cause dozens of small and regional banks to repay the government soon and rid themselves of public controversy. At the same time, it could take extra capital out of the banking system that might otherwise encourage lending. Many of those banks are in the eye of the financial storm as losses on commercial real estate and corporate loans worsen.

Wells Fargo and PNC Financial, two large consumer banks that acquired deeply troubled rivals in the throes of the crisis, are still holding on to billions of dollars of taxpayer funds. Many community banks received millions.


Sources: NY Times, CNBC, Citigroup