Citigroup (C) To Repay Government, But Payment May Come Too Early

There is finally news that Citigroup (NYSE:C) is close to repaying the government as much as $20 billion to return TARP funds so it can get out from under the government’s thumb on issues such as compensation and board appointments. The public does not know the exact details of how Citigroup will arrange for the government to convert its 34% ownership in the big bank to common stock and how that stock would then be sold. Normally, such a large sale would sharply depress the value of the bank’s shares. Citi also worked out a way to abridge the deal for $200 billion worth of assets which are backed by the government in a loss-sharing agreement. Citi believes that the paper has regained enough of its value so that the government’s aid is no longer necessary, but how the bank will cover any losses on the paper if they occur at a later date is not certain.

The most important aspect of the TARP exit by Citi is whether it should happen at all. Citi still has billions of dollars, and perhaps tens of billions of dollars of toxic assets on its balance sheet. The amount has not been disclosed to investors, but the Fed and Treasury probably have an exact picture of the value of the troubled derivatives. Citi is also faced with more write-offs on its commercial real estate loan portfolio and the credit cards it has issued to consumers.

All of the uncertainty about Citi’s balance sheet and future earnings prospects leave with government with the difficult decision of whether it should take the bank’s money for taxpayers or tell the bank to use the money that it raises to buttress its balance sheet. Taking the cash is attractive and would seem to be a victory for the TARP program. But, if Citi gets in deep trouble again it will have to return to the government for aid.

Citi may still need whatever money it may raise now and in the future. The government can afford to wait until the middle of next year to decide if it wants to walk away from the big bank completely.

Douglas A. McIntyre