Citigroup reached a deal early Monday morning to be the last of the big Wall Street banks to exit the government’s bailout program, after persuading regulators that it was sound enough to stand on its own.
Citigroup announced a broad program that will replace the $20 billion of remaining bailout aid with money from private investors, facilitate the sale of the government’s $25 billion in bank stock and allow it to wean itself off other forms of federal assistance.
To help replenish its coffers, Citigroup expects to raise about $17 billion by selling stock as early as this week and issue up to $7.2 billion in other capital by the first quarter of next year. The moves will leave the bank with one of the largest capital cushions of the major banks, assuaging regulators’ concerns about its ability to weather another severe downturn without returning to the government for help. The plan also should help Citigroup shed the stigma that came with accepting bailout money and remove the harsh compensation restrictions imposed on banks that received multiple bailouts.
“We are pleased to be able to repay the U.S. government’s trust preferred securities and to terminate the loss-sharing agreement,” the chief executive, Vikram S. Pandit, said in a statement. “We owe the American taxpayers a debt of gratitude.”
With its regulators’ permission, Citigroup will redeem $20 billion of preferred stock that the government received as part of the bank’s first two rescues late last year. It will end a loss-sharing agreement with the government on about $250 billion of troubled real estate and credit card assets. That will make the bank, not taxpayers, solely liable for losses in that portfolio.
The Treasury Department, meanwhile, plans to wind down its 34 percent ownership stake in Citigroup, which it acquired by converting $25 billion of preferred shares into common stock in a third rescue this year. It expected to sell its nearly 7.7 billion shares through a series of large stock sales to institutional investors over the next six to 12 months. The first sale, for up to $5 billion of Citigroup shares, is expected to occur alongside the bank’s $17 billion stock offering.
In a statement, the Treasury Department pointed to the deal as a sign its financial recovery effort was working. “The United States never intended to be a long-term shareholder in private companies,” it said. “Today’s announcement by Citigroup takes us another step in the right direction.”
The actions came hours before President Obama met with the chiefs of the nation’s biggest banks at the White House to press them to help speed the recovery by providing more loans to small businesses and homeowners. (Mr. Pandit did not attend the meeting, remaining in New York to help sell the deal to investors.)
Mr. Obama, who has faced criticism from Democrats and Republicans alike for being too close to Wall Street, called Citigroup, Goldman Sachs and 10 other big banks to the gathering as anger over last year’s bank bailouts continued to percolate. The president addressed the size of salaries and bonuses, an official said, as he seeks to impress upon bankers that they have a “special responsibility” to consumers.
“We have to get them off the sidelines and get them to play a more active role in our economic recovery,” Rahm Emanuel, the White House chief of staff, said on Sunday. “They play an essential role in helping the economy grow.”
As banks prepare to issue another round of hefty bonuses, White House officials renewed their harsh tone against Wall Street on Sunday. In an interview on “60 Minutes” on CBS, Mr. Obama chided “fat cat bankers” for increasing their own pay as average Americans struggled to recover.
Lawrence H. Summers, the White House chief economic adviser, said on “This Week” on ABC that bankers “need to recognize that they’ve got obligations to the country after all that’s been done for them, and there is a lot more they can do.”
Indeed, if the government approves Citigroup’s repayment of taxpayer funds, it would free it from pay restrictions for banks that received multiple bailouts. And with most of the nation’s biggest lenders out of the bailout program, the president may soon lose some of his leverage over the banks.
The White House has pointed to banks’ repayment as proof that the bailouts helped the financial system recover from near disaster, but it wants the banks to help get the economy moving by lending more to companies to create jobs and to consumers in danger of losing their homes to foreclosure.
Including Citigroup, bailed-out banks will have returned at least $136 billion, or more than half the $245 billion in bailout money extended this year — far faster than anticipated. Of course, the government still has tens of billions of dollars at stake with companies like the American International Group and General Motors.
The negotiations between Citigroup and regulators come just over a week after the government allowed its troubled rival, Bank of America, to repay its bailout money , underscoring just how quickly confidence has returned to the financial markets. It also shows the government’s desire to flatten the two-tiered system that emerged between Wall Street banks like Goldman Sachs and JPMorgan Chase, which quickly repaid the taxpayer money, and those that were required to hold onto the cash.
Although regulators will still keep a close eye on the bank’s activities, Citigroup executives said they believe the move will help win new business and ease relations with lawmakers. They also said they hope it will quell fear that the bank’s most talented bankers and traders might join hedge funds and other rivals that faced no restrictions on pay.
Under the terms of the deal, Citigroup will cease being subject to the harsher rules imposed by the federal pay czar beginning 2010. However, the bank will fall under a set of looser compensation restrictions, outlined in the economic stimulus bill, until the government sells its entire ownership stake.
Still, the deal may be a hollow victory for Mr. Pandit because it is unlikely to hasten Citigroup’s rapid return to financial health. In fact, it has already proved costly to its existing shareholders in the short term.
The moves will result in a $10.1 billion hit to Citigroup’s fourth quarter results, because of accounting charges taken on the value of the repaid preferred shares and the cancellation of loss-sharing agreement. The new stock offering, meanwhile, will severely dilute the value of existing Citigroup shares.
Prince Al-Waleed bin Talal of Saudi Arabia, once the largest shareholder, commended the deal and said he had no plans to unload his stake. He said the decision would bring “more certainty” to Mr. Pandit’s plans to run the business profitably.
Once the repayment deal is completed, it will still take several more years to clean up the financial aftermath. Citigroup has not posted a substantial profit in seven quarters, and the bank is expected to muddle through most of 2010 amid another wave of mortgage and credit card losses. And, like several big rivals, the bank continues to lean heavily on government support through a debt guarantee program that makes taxpayers liable if it is unable to pay back the loans.
Indeed, some analysts question whether the bank is still too weak to stand on its own. If the government allows banks to deplete their capital levels too soon, they argue, they may be setting the stage for another crisis.
Citigroup, however, maintains that the bank has among the highest cash and capital reserves in the industry, although its Tier 1 capital ratio— one indicator of financial strength — will fall to 11 percent from 12.8 percent after the company severs its ties with the government. Beyond the $17 billion stock offering, Citigroup plans to issue $3.5 billion of so-called tangible equity units and $700 million in subordinated debt. The bank also told its regulators that it may issue up to $3 billion of new trust preferred securities in the first quarter of 2010.
“We planned to exit TARP only when we were convinced it was prudent to do so,” Mr. Pandit said in the statement. “Citi is among the strongest banks in the industry, and we are in a position to support the economic recovery.”
Even so, regulators were deeply concerned about the bank’s financial condition throughout the talks. After Bank of America received permission to exit the bailout program early this month, Citigroup officials redoubled their efforts to cut ties with Washington. Much of the discussion centered on how much additional capital Citigroup would need to replenish its coffers after the government’s exit.
Citigroup argued it should have to raise only $15 billion more, an amount that would reduce the bank’s current capital levels and still leave it with a bigger cushion than its competitors.
Treasury and some Federal Reserve officials said they were comfortable with about that amount. But officials from the Federal Deposit Insurance Corporation, which has testy relations with Citigroup and deeper financial exposure, demanded the bank hold more capital.
Tension ran high as Citigroup and its regulators crammed a process that had taken months into a little more than a week of marathon discussions. If Citigroup did not reach a deal by Tuesday, bank officials feared it would be hard to pull off a big stock offering until next year, because many big investors leave for the holiday vacation.
The regulators’ decision is likely to cause dozens of small and regional banks to repay the government soon and rid themselves of public controversy. At the same time, it could take extra capital out of the banking system that might otherwise encourage lending. Many of those banks are in the eye of the financial storm as losses on commercial real estate and corporate loans worsen.
Wells Fargo and PNC Financial, two large consumer banks that acquired deeply troubled rivals in the throes of the crisis, are still holding billions of dollars of taxpayer funds. Many community banks received millions of dollars.
By Jeff Zeleny and Eric Dash – nytimes.com
Add A Comment