Citigroup Nears Deal to Return Bailout Billions

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Citigroup Nears Deal to Return Bailout Billions

By JEFF ZELENY and ERIC DASH
Published: December 13, 2009


WASHINGTON — Citigroup was close to a deal on Sunday night to be the last of the big Wall Street banks to exit the government’s bailout program, after trying to persuade regulators that it was sound enough to stand on its own.
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In the spring, the heads of major banks came to Washington to meet with President Obama, who is taking a harsher tone now.
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Citigroup Is Soon to Be the Last Wall St. Bank Held by U.S. (December 4, 2009)


Negotiations between the bank’s executives and senior government officials went into the night and could still collapse. On Monday, President Obama is 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 banks 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.

Citigroup officials plan to announce a broad program as early as Monday. In a series of complex transactions, bank officials expect to raise about $18 billion by selling stock this week, in an effort to assuage regulators’ concerns about the bank’s ability to weather another severe economic downturn without returning to the government for more money.

With its regulators’ permission, Citigroup would then redeem at least $20 billion of preferred stock that the government received as part of the bank’s first two rescues late last year. It would also exit a federal insurance policy on about $250 billion of troubled real estate and credit card assets. The bank, not taxpayers, would then be liable for those losses.

The Treasury also wants 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. The government is expected to sell its nearly 7.7 billion shares through a series of large stock sales over the next several months to institutional investors.

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 Citigroup’s chief executive, Vikram S. Pandit.

The move itself 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. Citigroup’s shares fell nearly 3 percent last week, to $3.95, over concerns the new stock offering would dilute their value.

Even if a 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. Some analysts think that the bank is still too weak to stand on its own.
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Related
Citigroup Is Soon to Be the Last Wall St. Bank Held by U.S. (December 4, 2009)


Citigroup executives, however, maintain that paying back the bailout money would have big advantages. Bank officials say it would quell fear that many of its most talented bankers and traders might join hedge funds and other rivals that have no restriction on hiring or bonuses.

Although Citigroup would still fall under the pay rules outlined in the economic stimulus bill until the government sells its entire ownership stake, its exit from the bailout program would mean it would no longer be subject to the harsher rules imposed by the federal pay czar.

Regulators remain concerned about the bank’s financial condition. 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 regulators were split over whether that was sufficient.

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

http://finance.yahoo.com/q?s=C