Citi stands alone as BankAm, too, returns bailout money

Life just got harder for Vikram S Pandit.

A day after Bank of America announced that it would repay its federal bailout money, Citigroup and Pandit, its chief executive, were left in the uncomfortable position of being the last of the Wall Street giants to remain tethered to the state. That will put the struggling bank at a further disadvantage as Bank of America and other rivals that have shed the stigma of government support become freer to raise compensation to attract talent and improve their standing with investors.

Citigroup’s fortunes have slipped recently as rising consumer losses overshadow gains from its trading activity, a business that has helped banks like Goldman Sachs return to record profits this year as the stock market rebounded.

Pandit has made clear that repaying money the bank received under the Troubled Asset Relief Program is a priority. But it may be difficult for the bank to reimburse the government anytime soon, given continuing problems with troubled assets and loan losses. It also must navigate some tricky tax issues that would accompany any repayment.
Citigroup has been pummelled in all parts of its financial empire, from credit cards and complex mortgage bonds in the United States to exposure to soured bonds in Dubai.

Its problems have resulted in a unique relationship with the government: In addition to providing $45 billion in TARP money, the federal government has agreed to back billions of dollars in soured assets that the bank is trying to sell.

In addition, Citigroup was the only TARP recipient, aside from GMAC, to convert government-issued shares into common stock to raise equity capital, giving the government a one-third stake in the bank.

Stuart Plesser, an equity analyst at Standard & Poor’s, said Bank of America had a major incentive to pay off its government aid, since it is searching for a new chief executive. Government restrictions on compensation made the position far less desirable — restrictions that will disappear once the money is repaid.

But Citigroup is not searching for new leadership, and its underlying problems are worse than Bank of America’s, he said.

“I don’t think the government is going to be as eager to let them out,” Plesser said.
And it is not clear that Citigroup should be in a hurry to repay the government as it grapples for ways to resolve its financial problems. While the bank probably has enough cash reserves and a clear strategic direction, it may need to demonstrate its ability to tap the capital markets before the government relents, analysts said.

“Citi needs to focus on solvency and asset sales,” said Chris Whalen, editor of The Institutional Risk Analyst. “They shouldn’t even worry about repaying TARP.”

The benefits of shedding government support were immediate for Bank of America. On Wednesday, the bank raised $19.3 billion in a sale of securities at $15 apiece, less than a year after its financial troubles made it virtually impossible to raise new money.

Still, Whalen questioned whether Bank of America’s efforts to repay the government were premature at a time when the Federal Reserve was also withdrawing supplemental support for many of the nation’s largest banks.

Any effort by Citigroup to get out from under the government’s thumb will probably require a complex, multistep transaction. Citigroup will need to buy back the $20 billion in preferred shares that the government still holds. It also may have to raise additional capital to replace what it paid and to prove its financial strength.

Even then, it must persuade the government to unload its roughly 7.2 billion shares in the company — sales that, given their vast size, might be completed in several stages. Without certain waivers, such moves could imperil the company’s capital position by causing it to lose billions of dollars in tax benefits.

Inside Citigroup’s Lower Manhattan offices, traders were resigned to the idea that Citigroup remained tied to the government, but they acknowledged the intense pressure on Pandit to pay back the bailout money quickly. Citigroup board members have moved TARP repayment to the top of the bank’s priority list.

But time is running out. Several Citigroup traders, who were not authorised to speak publicly, said they expected most of their colleagues to remain at Citi until they received their bonuses early next year. If a TARP payback plan is not place by March, some predicted an exodus to rival banks where pay is not subject to government restrictions.
While all the nation’s largest banks participated in the TARP program, only a handful needed to go back for a second helping of government money, including Citigroup and Bank of America. Both received a total of $45 billion.

The federal government is reviewing compensation practices at hundreds of banks, but for now, it has the authority to require changes only for executives at companies that have received “exceptional” amounts of aid, including the American International Group, General Motors and Citigroup. GMAC, which converted to a bank holding company last year, is the only other bank.

On Wednesday, treasury secretary Timothy F Geithner said the TARP program was winding down and close to the point where the government would not make new commitments. The $700 billion program is set to expire at the end of the year, and treasury officials have not said whether they plan to seek an extension.

It also remains unclear what, if any, timeline the government has negotiated with Citigroup. Treasury officials declined to comment, saying the agency did not talk about market-sensitive matters pertaining to individual institutions.