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Treasury Said to Link Citi Stake Sale to TARP Payback Plan


By Bradley Keoun

Dec. 7 (Bloomberg)—The U.S. Treasury Department aims to hold off on selling its 34 percent stake in Citigroup Inc. (C) until the bank and regulators agree on a broader plan to repay all obligations remaining from last year's $45 billion government bailout, a person close to the department said.

Treasury officials are concerned that a sale now of its 7.7 billion shares in the New York-based bank may weaken investor demand should Citigroup subsequently be required to raise capital as a condition of exiting the bailout program, said the person, who declined to be identified because the government hasn't publicly discussed the plans.

Citigroup executives have pressed Treasury for at least three months to sell the stake as a first step toward leaving the bailout program, according to people familiar with the matter. They want to escape government-imposed pay limits that may make the company vulnerable to employee-poaching by unfettered rivals. Bank of America Corp. (BAC), the only other large U.S. bank under pay limits, last week announced a plan to exit the program.

"This should be well thought-out for the benefit of all constituencies, and in this case that includes shareholders, the government and the taxpayers," said Dennis Santiago, chief executive officer of analysis firm Institutional Risk Analytics in Torrance, California. "Just because Bank of America goes doesn't mean you have to rush Citigroup."

Taxpayer Reimbursement The government is trying to wind down bailout programs extended as financial markets convulsed late last year. Treasury Secretary Timothy Geithner said in a Dec. 4 interview that most taxpayer money injected into banks through the Troubled Asset Relief Program will eventually be recovered.

While holding off on a sale of its Citigroup stake, the Treasury has pushed regulators behind the scenes to accelerate discussions with all large banks about their plans to exit TARP, the person close to the department said.

In November, the Federal Reserve asked nine of the biggest U.S. banks to submit plans to repay the government's capital injections. In testimony last week before the Senate Banking Committee in Washington, Federal Reserve Chairman Ben S. Bernanke said Bank of America got approval to exit TARP only after regulators "felt it was safe and reasonable and appropriate."

Charlotte, North Carolina-based Bank of America, the biggest U.S. lender, agreed to raise at least $18.8 billion of capital, according to a Dec. 2 press release. It said later that it had raised $19.3 billion.

Free to Sell JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. and Morgan Stanley (MS), all based in New York, repaid their bailout funds in June. San Francisco-based Wells Fargo & Co., which still has $25 billion of TARP money, isn't subject to pay limits because it never needed a second helping of bailout funds, as Citigroup and Bank of America did.

In October, Citigroup CEO Vikram Pandit, 52, said he was "focused on repaying TARP as soon as possible." He said, "We're going to do so in consultation with the government and our regulators." At least twice since September, he has said the Treasury is free to sell its shares at any time.

The Treasury got the shares in September, when $25 billion of the bailout funds were converted into common stock. The shares are now worth $31.2 billion, based on a Dec. 4 closing price of $4.06, giving Treasury a paper profit of more than $6 billion.

Kuwait, Singapore A government of Kuwait investment fund that got about 900 million shares in a related preferred-stock conversion said yesterday that it had sold the stake for $4.1 billion, reaping a $1.1 billion profit. In September, a Singapore government fund that got about 2.1 billion shares in the conversion said it had used open-market sales to reduce the stake to less than 1.14 billion shares.

The U.S. government doesn't want to be viewed as trying to time the market, so part of Citigroup's TARP exit plan would include a formal process for disposing of the common stake, the person said. Even if Treasury sold now at a profit, it might be second-guessed later if the shares rose further, the person close to the department said.

"We don't comment on individual banks but are committed to maximizing returns on bank investments and restoring stability at the least possible cost to taxpayer," Treasury spokesman Andrew Williams said.

Citigroup spokesman Jon Diat declined to comment on the Treasury's plans or the bank's timeline for repaying TARP funds.

Asset Guarantees Citigroup's discussions with banking regulators over a TARP exit may gain momentum now that Bank of America's plan is set and regulators focus on Citigroup, the person close to Treasury said. The bank's regulators, which include the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., haven't commented on when the bank might be allowed to exit.

Citigroup still has $20 billion in bailout funds along with guarantees from the Treasury, FDIC and Federal Reserve on $301 billion of devalued securities, mortgages, auto loans, commercial real estate and other assets. Citigroup paid $7 billion in advance for the guarantees, which last five to 10 years, depending on the type of underlying assets.

The lender's exit plan may be more complicated than Bank of America's because the government must decide how to handle the Treasury's common stake and what to do about the asset guarantees, the person close to the department said.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net

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