No More Tarp for Citi, But TBTF Lingers

Congratulations, America. You're still on the hook.

That may as well have been the first bullet point on the news releases announcing Citigroup Inc.'s plans for repaying the Troubled Asset Relief Program and canceling a loss-sharing agreement with the government on more than $300 billion of loans and securities. For while Citigroup gets to escape the pay czar, and the Treasury Department gets to claim a key victory, the taxpayer gets no relief from the burden of too-big-to-fail institutions — only a "debt of gratitude" from Citigroup Chief Executive Vikram Pandit and a promise that the company will do more to help homeowners and other borrowers in need.

The real bullet points atop Citi's release were confined to logistics, including a breakdown of the more than $20 billion it plans to raise in the capital markets; a timetable for the shedding of the government's stake in the stock; and a totaling of the dividends paid or accrued under the Tarp investment, which will reach $3.1 billion by Dec. 31.

For its part, the Treasury Department dispensed with bullet points altogether, getting right to this statement: "We are pleased that Citigroup is moving ahead with plans to pay the taxpayers back. 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."

But really, it is only explicit support for Citigroup that is being transferred into the private sector. And even that may be overstating things, if the government ends up having to swoop in again with a rescue that shifts the burden right back onto taxpayers.

"We have turned every really large bank, every systemically dangerous institution, into a government-sponsored enterprise, and everybody knows it in the marketplace," said William K. Black, an associate professor of law and economics at the University of Missouri, Kansas City, and a former senior deputy chief counsel of the Office of Thrift Supervision.

"There is no reason to believe that Citi is even remotely healthy," he added.

Citigroup executives declined to make themselves available to comment Monday, but no doubt Black's assessment is one with which Pandit would disagree. In a presentation accompanying its news release, Citi touted its 9.1% Tier 1 common ratio at the end of the third quarter — 9% on a pro forma basis, adjusted for the mechanics of the Tarp repayment — as outshining the 8.4% pro forma ratio for Bank of America Corp., the 8.2% ratio at JPMorganChase & Co. and the 5.2% ratio at Wells Fargo & Co.

"As I have stated many times over the past year, we planned to exit Tarp only when we were convinced that it was prudent to do so," Pandit said in Citi's news release. "By any measure of financial strength, Citi is among the strongest banks in the industry, and we are in a position to support the economic recovery."

But if "by any measure of financial strength" he meant profits, his assertion is shaky at best.

After showing two quarters of profits at the start of the year, Citi swung to a loss in the third quarter, as credit costs tied to loans and charge cards offset gains from its trading desks.

As Credit Suisse banking analyst Moshe Orenbuch points out, "Earnings are the first defense against credit losses. Capital is only the second defense."

In the absence of a stronger earnings trail, Tarp gave Citi the bridge it needed to regain its footing. "Citi raised a significant amount of capital, much of which was dilutive to their existing shareholders. And at the same time some of the government programs worked, and some of the asset values that they were afraid might deteriorate significantly have stabilized," said Orenbuch, who has a "neutral" rating on the stock.

The government's support did not come cheaply for Citi. In July, the government swapped its initial $25 billion investment in preferred shares for common stock, while private holders of the company's preferred securities were persuaded to do the same, diluting the existing shareholder base.

The $20 billion Citi got in a second bailout in late 2008 came with an 8% dividend attached, making the money more expensive than the 5% capital that other banks got through Tarp.

The loss-sharing agreement cost Citi another $7.1 billion in trust-preferred securities, $1.8 billion of which are being canceled now that the agreement is being unwound. The loss of the agreement also adds $144 billion to Citi's risk-weighted assets.

But a source close to Citi has said the company was deseparate to get out from under the pay restrictions established by the special master overseeing compensation at the seven institutions requiring the most public aid. Indeed, Citi will shed the "exceptional financial assistance" label beginning in 2010, meaning it can pay more and worry less about having its best employees poached, particularly on the investment banking side of the business.

That is a dangerous message for the government to be sending, though, Black said. "The idea that we would let systemically dangerous institutions like Citi go back to exactly the pattern that helped lead us to the financial crisis — that is the absolute travesty here."

But Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who has been tracking Tarp returns, said Citi's repayment benefits taxpayers, particularly with respect to the end of the loss-sharing agreement.

"This, by far, was the 800-pound gorilla that you were worried was going to walk into the room, and it seems like we're still retaining most of the insurance premiums" that Citi paid for the agreement, he said.

But "until the implicit guarantee is really put off the table, and I don't think we're at that stage yet, that's going to make it easier for large institutions like Citi and B of A to raise capital," Wilson said.