Behind the scenes but barely out of sight, Citigroup (NYSE:C) is fighting with federal agencies about how much money it will need to have on hand to exit the TARP program.

Taxpayers own about a third of Citi and the government agreed early last year to guarantee a portfolio of over $300 billion in loans on the bank’s books against excessive losses. The balance of the portfolio is now $182 billion, according to Reuters.

The government has been able to make a fairly clean exit from banks such as Bank of American (NYSE:BAC) and Goldman Sachs (NYSE:GS). These firms paid back their TARP money and the value of warrants the government got as part of those loans.

Several federal agencies want the government to sell its Citi equity stake before the bank can pay back the $45 billion it owes. Selling a third of Citi’s shares may be difficult. Whow would buy such a large stake?

The biggest hurdle to Citi repaying its TARP funds is the several government agencies including the FDIC do not believe that the big bank is healthy enough to repay what it owes taxpayers and still have a viable balance sheet, especially if commercial and consumer credit write-offs increase next year. Citi may have to come back to the government a second time if its earnings are hurt badly enough. Federal agencies would then have to admit that they acted prematurely.

Citi may want out from under the regulation of it pay packages and board activities, but the government gains nothing  by being hasty. Citi may continue to do well, and the taxpayer then gets a handsome reward on the big bank bailout, or, if the firm struggles, the money that it has now from TARP and the government’s loan guarantees should see it though. The risk of allowing Citi to become “independent” this year while the credit crisis continues is simply too great.

Douglas A. McIntyre

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