The only remaining bank on "exceptional financial assistance" will escape pay restrictions by raising billions through the sale of equity and debt
By Bradley Keoun
(Bloomberg) — Citigroup (C), recipient of the biggest U.S. bank bailout, struck a deal with regulators to repay $20 billion to taxpayers and escape government-imposed pay restrictions.
Citigroup, the only major U.S. lender still dependent on what the government calls "exceptional financial assistance," will raise the funds with a sale of $20.5 billion of equity and debt. The New York-based company also plans to substitute "substantial common stock" for cash compensation, the bank said in a statement today.
Chief Executive Officer Vikram Pandit has pressed for an exit from the Troubled Asset Relief Program out of concern that TARP's pay constraints make Citigroup vulnerable to employee poaching by Wall Street rivals. Bank of America Corp., the biggest U.S. bank, exited the program last week after paying back $45 billion of rescue funds.
"It's great news," Gary Townsend, chief executive officer of Hill-Townsend Capital, an investment firm in Chevy Chase, Maryland, said in a Bloomberg Television interview. "It's important for Citi to exit these extraordinary agreements with the U.S. Treasury and the government as quickly as possible. It's expensive perhaps, but I think it had to be done."
The bank will sell $17 billion of common stock, with a so- called over-allotment option of $2.55 billion, and $3.5 billion of "tangible equity units." The U.S. Treasury will sell as much as $5 billion of common stock it holds, with plans to unload the rest of its stake during the next six to 12 months.
An additional $1.7 billion of common stock equivalent will be issued next month to employees in lieu of cash they would have otherwise received as pay.
"So much is wrapped up into intellectual capital retention," said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas. "It's such a big part of these banks at this point. They don't want to be at a disadvantage as it relates to contract renegotiations coming into year-end."
The TARP payments will result in a roughly $5.1 billion loss. Citigroup will also terminate its loss-sharing agreement with the government on $301 billion of its riskiest assets. Canceling about $1.8 billion of trust preferred securities linked to the program will result in a $1.3 billion loss, the company said.
Citigroup fell 17 cents, or 4.4 percent, to $3.78 in New York Stock Exchange composite trading at 10:22 a.m., the biggest decline since Oct. 30. The stock has tumbled 44 percent this year, valuing the lender at about $86 billion.
Citigroup owes "taxpayers and the government a debt of gratitude for their extraordinary assistance," Pandit said today in a memo to employees obtained by Bloomberg News. "These actions bring us closer to ending a very difficult period for our company."
The U.S. earned a net profit of at least $13 billion from its investment in Citigroup, a Treasury official said today. The estimate includes about $3 billion in dividends and gains on the common-equity stake, roughly $5.8 billion based on the Dec. 11 share price.
Kingdom Holding Co. Chairman Prince Alwaleed bin Talal, once Citigroup's largest individual shareholder, said after the announcement that he has no plans to sell shares in the bank.
Bank of America
In October, Pandit said he was "focused on repaying TARP as soon as possible" in cooperation with regulators. He pushed to accelerate the talks after Bank of America's (BAC) plan was announced, people familiar with the matter said last week.
Citigroup, which took $45 billion of TARP funds last year, converted about $25 billion in September into common stock, equivalent to a 34 percent stake.
The government is winding down the bailout programs it arranged 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 TARP will eventually be recovered.
JPMorgan Chase & Co. (JPM), Goldman Sachs Group (GS), and Morgan Stanley (MS), all based in New York, repaid bailout funds in June. San Francisco-based Wells Fargo & Co., with $25 billion of TARP money, isn't subject to pay limits because it never needed a second helping of bailout funds.
Companies still dependent on the Treasury's exceptional assistance program include American International Group Inc. and General Motors Corp.
To contact the reporter on this story: Bradley Keoun in New York at email@example.com.