Officials at Citigroup, Inc. (C) and Wells Fargo & Co (WFC) are in intense discussions with the U.S. government over the scope of capital requirements the banks would need to exit the Troubled Asset Relief Program (TARP).
At issue for Citigroup is a 20% dilution in shareholder value which would be necessitated if it were to follow the government’s capital raising requirements. Citigroup is looking to redeem $20 billion in preferred stock. With a stock market value of less than $100 billion, the hit to shareholders would be difficult.
“That’s a pretty tough pill to swallow,” said a person familiar with the New York company’s discussions with the government.
Both Citigroup and Wells Fargo argue that they should be offered similar terms afforded to Bank of America Corp. (BAC) which won approval to repay its $45 billion in federal aid. Bank of America subsequently sold $19.29 billion in stock as part of its exit strategy.
Both banks are also concerned about being at a competitive disadvantage if they don’t quickly follow Bank of America out the TARP door. TARP recipients face pay restrictions that come with the taxpayer-funded aid. Citigroup also has foregone some non-U.S. investment opportunities, wary of being castigated for spending U.S. taxpayer dollars outside its home country, according to people familiar with the matter.
Bank of America is running advertisements this week that tout its repayment. “We’d like to say thank you to the taxpayers of America,” one of the ads says.
Among the agencies that have a say in deciding when banks can leave TARP, the Fed has been especially reluctant to let them repay quickly, wary that mounting losses could leave the banks strapped for capital, according to people familiar with the matter. Treasury officials are been eager for banks to repay TARP, hoping to use excess money for other purposes.
If the financial bill passes Congress, additional reserve requirements will be levied on the largest banks. Citigroup, Wells Fargo, and Bank of America would be particularly hard hit.
However, officials with the Federal Reserve and Treasury have told the two banks that they will have to raise more capital relative to what they are seeking to repay than Bank of America did.
Disagreements over capital-raising mean Citigroup is unlikely to repay its TARP investment in the foreseeable future, according to people familiar with the matter.
Wells Fargo, based in San Francisco, has expressed frustration with TARP ever since the program was launched last year. Bank executives have said they accepted the money only because they were forced to, though the aid has helped Wells Fargo absorb losses following its takeover of Wachovia Corp.
A Treasury official said banks “are pursuing discussions to understand what needs to be done to move ahead with repayment. We continue to believe that banks and our financial system are better off with private capital instead of government capital.”
