Exclusive: Citi, U.S. disagree over capital for TARP exit
NEW YORK/WASHINGTON |
NEW YORK/WASHINGTON (Reuters) - Citigroup Inc and the U.S. government disagree over how much the bank should raise to repay taxpayers and talks may not finish for weeks or even months, people briefed on the matter said on Monday.
The bank and the United States have to resolve questions including how the government would shed its roughly 7.7 billion shares in the bank -- worth $31 billion at current prices -- and how the government would stop insuring a pool of troubled assets against loss, the sources said.
After Bank of America Corp sold $19.3 billion of shares last week and announced a plan to repay government money borrowed through the Troubled Asset Relief Program, investors are paying close attention to other banks that may soon leave the program.
Citigroup has much to gain from exiting TARP. The U.S. government has a good deal of say over how it pays its top executives, for example, which could hinder the bank's efforts to retain its best employees.
But Citigroup may have more trouble paying back bailout funds than Bank of America did, because it has received more government support. The United States owns about a third of the bank's shares, after Citigroup gave a big chunk of common stock to investors in exchange for preferred shares.
The government also guarantees a portfolio of Citigroup assets against excessive losses. That portfolio stood at around $182 billion at the end of the third quarter.
The government did not own Bank of America common shares and never closed on a deal to guarantee a portfolio of the bank's assets against high losses.
Another wrinkle in Citigroup leaving TARP is the issue of profitability. The bank has been struggling to generate income from its main operations, while Bank of America has been more consistently profitable.
Although Citigroup has some of the strongest capital levels in the industry, according to measures such as tangible common equity to tangible assets, regulators want to be sure that credit losses will not eat into those ratios.
Citigroup spokesman Stephen Cohen declined to comment, as did a spokeswoman for the U.S. Treasury.
The Wall Street Journal reported late on Monday that Wells Fargo & Co also was looking to exit TARP, and was also wrestling with the government over how much capital to raise.
A Wells Fargo spokeswoman declined to comment.
A wide array of regulators must sign off on Citigroup's departure from TARP. Federal Deposit Insurance Corp Chairman Sheila Bair, with whom Citigroup's senior managers have clashed in the past, said last week that the Federal Reserve has been consulting with the Office of the Comptroller of the Currency and the FDIC on the big bank repayments.
Bair, who has been a skeptic of loosely underwritten government bailouts, has said the U.S. needs to "be very careful" with allowing the repayments. Bair has insisted that the government is not going to step in with further rescues of large institutions.
Earlier this year, Citigroup Chief Financial Officer Edward "Ned" Kelly was moved out of his spot and into a vice chairman role, soon after he referred to the FDIC as "our tertiary regulator" in the Wall Street Journal. The FDIC had pushed for a shake up of the bank's top management.
Regulators have a good deal of say in Citigroup's affairs after the bank received $45 billion of capital from the government over the course of two rescues last year and sold another $7 billion of preferred securities to the United States as a fee for guaranteeing the special portfolio.
In a third rescue earlier this year, the government agreed to exchange $25 billion of those preferred securities for common shares. The government essentially bought shares in that deal for $3.25 each. Citi's shares closed at $4.03 on Monday, so at current levels, the share stake is worth about $31 billion, giving the U.S. a roughly 25 percent paper profit.
Citigroup's shareholders have not fared as well so far this year--the bank's shares have fallen about 40 percent since the end of 2008.
For Citigroup to exit TARP, there must be a plan for the government to sell its shares. Multiple scenarios have been discussed, including the U.S. selling shares in a single block, or a few blocks.
As part of the third rescue, the government also agreed to convert its remaining $27 billion of Citigroup preferred securities into instruments known as trust preferred securities. The bank could have to sell common shares to buy back some or all of these instruments, which have characteristics of debt and equity.
Citigroup must still work with U.S. pay czar Kenneth Feinberg until it has repaid all the government's trust preferreds.
If Citigroup were to sell shares to leave TARP this year, it would likely have to complete a deal in the next week or so, because capital markets essentially close down in the final weeks of the year.
People briefed on the matter said that although the bank may be able to resolve its differences with the government in the coming weeks, it is more likely to do so in the first or second quarter.
(Additional reporting by David Lawder; editing by Gerald E. McCormick, Andre Grenon and Carol Bishopric)
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