$hiti Repays Debt / Whats the Point?

Citi's TARP Repayment: The Downside for a Troubled Bank
By Stephen Gandel Tuesday, Dec. 15, 2009

Can Citigroup survive without a government safety net? Some analysts aren't
sure.
On Monday, Citigroup said it had worked out a deal to repay $20 billion in
government bailout money and terminate a loss-sharing agreement the bank had
with the government for Citi's riskiest assets. Citi CEO Vickram Pandit said the
moves were signs that his company was returning to financial health. The deal
would also remove much of the government's pay restrictions on the bank. "These
actions move us closer to ending a very difficult period for our company," wrote
Pandit in an internal memo to Citi employees. (See 25 people to blame for the
financial crisis.)

But analysts say Citi's rush to repay the assistance it got through the
government's Troubled Asset Relief Program (TARP) will make the bank weaker, not
stronger. The move will reduce Citi's capital ratios and hurt earnings; it may
also accelerate a retreat of foreign investors from the company's shares. Worse,
the government is demanding stricter terms from Citi than it did from Bank of
America on the repayment deal it struck just a week ago. The different treatment
shows that the government remains more concerned about Citi's finances than
those of its rivals.

Veteran analyst Richard Bove of Rochdale Securities, who had been recommending
Citi's shares since the summer, downgraded the stock on news that it was going
to repay TARP from a "buy" to a "sell" rating. "What does it do for the company?
Management can increase [executive] salaries," says Bove, referring to the fact
that Citi will now be free of the government's compensation rules. "What else?
Nothing."

Indeed, Citi's shares fell on the news that it was repaying TARP, down $0.27, or
nearly 7%, to $3.68 a share.

Citi's deal to pay back the government was reportedly hashed out over a week's
worth of marathon negotiations following Bank of America's repayment last week
of $45 billion in government assistance. Citi did not want to be one of the few
remaining big banks still using the government's crutch.(See the worst business
deals of 2009.)

Citi's effort to repay the government will remove some of the stigma surrounding
the firm that has evolved since the start of the financial crisis. Treasury
officials say Citi will no longer be considered one of the companies that have
received "exceptional assistance" from the government. That means pay czar
Kenneth Feinberg will no long have a say over salaries at the company. What's
more, the company will save $1.6 billion in annual preferred-stock dividend
payments it would have owed the government on its TARP loan.

Nonetheless, the deal will be costly for Citi. In order to exit TARP, the bank
will have to sell $20.5 billion in new shares. Analysts estimate the stock sale
will lower the company's earnings per share by about 20%. "One of the basic
problems for [Citigroup's] valuation is that it has too many shares as a result
of its many rounds of capital raising and exchange offers," says analyst David
Hensler, who follows Citi for research firm Creditsights.

But raising all the capital to pay back TARP won't improve Citi's balance sheet
either. In fact, it will do the opposite. Bove estimates that TARP repayment
will lower the company's Tier 1 capital ratio to just over 11%, from a recent
12.8%. What's more, with the elimination of the government guarantee of Citi's
riskiest assets, which could expose the bank to as much as $250 billion in
additional losses, the bank's Tier 1 ratio will sink further, to 10%, according
to Hensler. (See 10 big recession surprises.)

But Christopher Whalen, managing director of research firm Institutional Risk
Analytics, thinks the problem with Citi's repayment has less to do with capital
ratios and more to do with waning confidence in the bank around the world. In
early December, the investment arm of the government of Kuwait sold its entire
investment stake in Citigroup. "Foreign investors like to see the government's
stake in Citi," says Whalen. "If the government gets out, investors around the
world will flee."

Finally, the deal Citi struck with the government may indicate to investors that
the bank is actually in worse shape than many thought. To exit TARP, Bank of
America was required to raise $18.5 billion in new capital, or about 40% of the
$45 billion in capital it repaid the government. Other banks have had to raise
as much as half of the amount they want to pay back the government in new
capital. Citigroup, though, is required to raise more than 100% of what it wants
to pay back — $20.5 billion in new capital, half a billion dollars more than it
will pay Uncle Sam. That suggests the government is still worried that Citi has
significant losses on its books and needs to hold more capital than other banks.

"Letting Bank of America repay its TARP funds was ridiculous, but letting Citi
out is even more problematic," says Whalen.





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