Citibank Looking to Repay Taxpayers
Officials must decide if Citi is ready to payback bailout…
It remains to be seen whether financial institutions that took Federal funds to survive the recent economic downturn can weather another crisis. But one of the largest recipients of government support, Citibank, is working to convince government officials that they are stable enough to handle things on their own and to end their connection with the taxpayer bailout program. Citibank has been struggling over the past two years as profits have sharply declined and credit card and mortgage defaults have escalated. The rescue of Citigroup was the most extensive for the US banks hit by the financial crisis last year.
If the government agrees, Citibank will sell $20.5 billion in new securities to help repay $45 billion in federal aid by the US Treasury Department’s Troubled Asset Relief Program (TARP) and to buy back preferred shares of stock converted by the Treasury for a stake of more than one third of Citibank. The company would no longer by under the scrutiny of the government and compensation restrictions. They also unveiled a plan to emerge from the bailout.
The bank would also recoup $25 billion of preferred stock that the government acquired in the bailout. In addition, Citibank would be liable for all losses, as a Federal insurance policy on the bank’s real estate holdings and weak credit card assets will be terminated. “Citi is raising a lot of capital and the government will still own a chunk of stock for six to 12 months, represent a big positive step for Citi in its turnaround,” Deutsche Bank analysts said in a recent report.
Citibank officials believe the payback of bailout money will benefit the bank and squelch rumors that some of their top executives are leaving for positions with rival companies. However, as long as Citibank is still seen as overextended, the Treasury will be reluctant to sell back their 34% stake in the company. The Treasury also commented on the deal, saying, “Treasury has repeatedly stated that the United States never intended to be a long-term shareholder in private companies. As banks replace Treasury investments with private capital, confidence in the financial system increases, government’s unprecedented involvement in the private sector diminishes, and taxpayers are made whole.”
Citi has told regulators that it may sell up to $3 billion of trust preferred securities in the first quarter of 2010 to support its capital strength. Experts do not expect the bank to begin showing any substantial profit until late 2010 or early 2011. “We owe the American taxpayers a debt of gratitude and recognize our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need,” Citi Chief Executive Vikram Pandit said in a statement. After Citi, one of the only major banks left in TARP is Wells Fargo & Co., which has a smaller investment bank.
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