Wall Street was abuzz Thursday about Citigroup's behind-the-scenes efforts to exit the Troubled Asset Relief Program, and the conditions under which it would be allowed to.

Would the repayment of $20 billion in Tarp funds necessitate that Citi raise an equivalent amount of capital from the private markets? Could it get away with raising just $10 billion or $15 billion? Would investors be willing to throw money at Citi the way they did at Bank of America Corp.?

Citi itself refused to comment. The Treasury Department, which appeared to be at or near the center of press reports with veiled sources on the topic, continued to tap-dance publicly around questions about what it would take for the company to get released from the program. The official silence made it impossible for a Citi repayment to be ruled in or out.

But underneath all the will-they-or-won't-they chatter was a bigger, more philosophical question: Should they?

Should a company that just over a year ago required a $45 billion infusion from the government and a loss-sharing agreement on more than $300 billion of risky assets be released back into the financial wild? Should a firm still weighed down by $600 billion of assets it wants to get rid of be given what amounts to the Treasury Department's Good Housekeeping seal of approval? Should a poster child for the policy of too-big-to-fail be allowed to go back to doling out pay however it sees fit?

No way, says Edward Kane, a professor of finance at Boston College and a founding member of the Shadow Financial Regulatory Committee policy study group.

"You can't let them out from under it when they will still be relying completely on the implicit guarantee from the government that if they get into trouble again, we will bail them out," Kane said.

And yet, the temptation remains to allow Citi out of the Tarp — a development that no doubt would allow Treasury officials to deem the program a success, and allow Citi to get out from under strict compensation rules just in time for bonus season on Wall Street. Citi's Tarp investment moved quickly into play the moment B of A announced its own hasty exit from the program, which was officially completed Wednesday.

"It is a good thing for the country that banks are eager to get out of the investments that government has imposed on them," Treasury Secretary Tim Geithner said Thursday at a hearing of the Congressional Oversight Panel on Tarp. "That is healthy, necessary and desirable."

Geithner promised that the government's investment would not be redeemed "in a way that leaves this system with, and these institutions with, inadequate cash to face the challenges ahead," and said banks are being asked to raise capital in the private markets as they refund taxpayers.

Stock analysts suggested Citi would have little problem finding private capital, based on B of A's wildly successful offering.

"Bank of America raised $19 billion overnight," said Jeff Harte, an analyst with Sandler O'Neill & Partners LP. "They showed that there is an opportunity here."

Institutional investors only hold about a fifth of Citi's shares, compared with rates of 70% or higher for rivals, Harte said, implying there is room in the market for a big Citi offering.

Any new investors in Citi shares would have to be comfortable with the prospect of heavy dilution from the eventual release of the government's 34% stake in the company, although that is something that could be factored into the terms of the offering.

"They'll extract a very good price," Kane said. "But they'll be taking on a big bet."

And they would be making that bet while the health of the economy, and by extension the health of the banking industry, remains very much in doubt.

"At the very time when foreclosures are accelerating, now they [the policymakers] are going to shift the risk back to the private sector?" asked Christopher Whalen, managing director of Institutional Risk Analytics and an outspoken critic of Citi. "It's OK if you're the Treasury and want the banks to take advantage of the markets here to raise money, but don't let them repay Tarp yet."

Two months ago, Citi Chief Executive Vikram Pandit seemed eager to downplay concerns that the firm was suffering because of compensation restrictions tied to the bailout. Only the top 100 earners at the company were subject to a compensation review, he reminded investors at a Barclays Capital banking conference. "Away from these — don't forget we have 275,000 people — 274,900 will be paid competitively for performance as well as recognizing the fact that they need to have an incentive to drive long-term performance."

But a source close to Citi says the company is now desperate to shake off the pay constraints implemented by the government, which appointed a special master to oversee compensation at Citi and the six other firms needing the most government assistance.

It is unclear, though, whether Citi would remain beholden to government rules on pay even if it redeems the $20 billion in trust preferred securities that the Treasury holds under Tarp. The company still has a loss-sharing agreement covering $306 billion of securities, loans and commitments backed by real estate and other assets. Under that agreement, hammered out last fall, Citi assumes the first $29 billion of losses, and the government would assume 90% of losses above that amount, with Citi responsible for the balance.

Casting off some of the layers of government protection on Citi may be a risk, but any private capital raised in the process, either through equity offerings or asset sales, could be a positive for bondholders, said Kathleen Shanley, senior credit analyst at independent research firm GimmeCredit. "They've been considering the Tarp a temporary solution, so to the extent that you have permanent common equity coming in, that's a cushion for bondholders," she said. But deciding the fate of Citi involves considerations that go well beyond bondholders.

"The larger issue is the whole question of too-big-to-fail," Shanley said. "We haven't solved that problem, and that's a policy concern."

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