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Citigroup in $20.5bn cash call to repay bailout funds

Move will allow bank to pay executives and top traders bumper bonuses

Stephen Foley
Tuesday 15 December 2009 01:00 GMT
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Citigroup will be freed to pay bumper bonuses to its executives and top traders from the start of next month, even though the US government could still own a substantial stake in the financial giant until this time next year, under an agreement signed yesterday.

The deal represents a coup for Citigroup's management, but comes at a cost to existing shareholders. The bank said it planned a dollar-for-dollar fundraising to pay back the US government's bailout money, after the Treasury balked at allowing it to add substantial new leverage to its balance sheet.

Citigroup said it would raise $20.5bn (£12.6bn) in shares and equivalent financial instruments, as well as paying a $1.7bn sliver of its employee bonuses in shares instead of cash. The US Treasury holds $20bn in preferred stock of Citigroup as a result of the emergency cash injections it made during last year's financial panic, and will be repaid that money immediately.

However, taxpayers handed Citigroup $45bn in all last year, under the bailout scheme known as the Troubled Asset Relief Program, or Tarp. The other $25bn was converted into shares, which the government said will be sold over the course of the next six to 12 months. A first tranche of up to $5bn of the government's shares will be sold in the market in the next few days, reducing its stake from 34 per cent.

The government is also tearing up a guarantee which had put the US taxpayer on the hook for losses in a $301bn portfolio of Citigroup's mortgage-related investments and other credit derivatives. Citigroup will no longer be designated a firm in receipt of "exceptional financial assistance", and therefore not subject to caps on pay for its top 100 earners from the start of 2010.

"The Tarp was designed to provide assistance until banks were in a position to repay it prudently," Vikram Pandit, Citigroup's chief executive, said yesterday. "We owe the American taxpayers a debt of gratitude and recognise our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need."

Citigroup's shareholders have been battered by the losses at the firm, and their stakes have been repeatedly diluted as the company raised new capital. The latest issuance brings the total number of shares in existence to about 29 billion, up from just 5 billion before the crisis erupted.

Chris Kotowski, an analyst at Oppenheimer, called the exit from Tarp "a mixed blessing". He said: "It is disappointing that the plan began with a capital raise and ends with the sale of the government's common stock, rather than the other way around. Even after this ... the government will still own about 22 per cent of the common stock. It almost seems as if the most dilutive route possible was taken."

Mr Pandit and Dick Parsons, Citigroup's chairman, had hoped not to need such a large fundraising, but regulators were concerned that Citigroup did not pile additional risks to its balance sheet. Citigroup argued that it was already one of the best-capitalised big banks.

*Wells Fargo is selling $10.4bn in new stock to help repay all $25bn in bailout aid it received from the government at the height of the market meltdown last year. The move will extricate the San Francisco-based bank from the pay restrictions and close oversight that came with the bailout programme.

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