Citigroup (NYSE: C) Repaying TARP, Positive Sign or Avoiding Pay Restrictions?

In a move that was telegraphed worse thane one of Josh Freeman’s passes, Citigroup (NYSE: C) announced earlier today that it will be repaying the $20 billion it received in the TARP program during the last twelve months. Concurrently, the government announced plans to sells it’s stake in the firm, which approximates to one-third of the company’s value.

Citigroup will likely receive a boost from this news, similar to what Bank of America (NYSE: BAC) experienced just two weeks ago. By paying back the public money, the firm is now free from the scrutiny and pay restrictions that came along with the rescue program.

Although the firm has struggled to produce profits, they have rebounded mightily from the depths of last year. Some analysts were even saying that Citigroup would fail completely, and be taken over by the government. It was tough to argue with their forecast at the time, as the firm was among the hardest hit by the credit crisis, experiencing record numbers of loan defaults. To rescue them, the government gave Citi $45 billion in loans, and to further boost investor and depositor confidence agreed at the time to protect losses on nearly $300 billion in risky investments.

While the news is positive, it does not come free of cost – in an effort to raise new capital and appease the fears of bank regulators, the firm will need to issue new shares, which will in effect dilute current shareholders’ stake in the firm. Citigroup will sell a total of $20.5 billion in stock and debt to repay the bailout funds. The remaining $25 billion Citi had received was converted into stock earlier this year, and as the stock has risen by over 20 percent since then, the Treasury department is in line for a tidy profit, to the tune of $13 billion.

With the recent news of Citigroup and BofA, the last national bank that is still holding bailout money is the San Francisco based Wells Fargo & Company (NYSE: WFC). The other major commercial and investment banks repaid the government earlier this year.

The repayment by Citi comes as top executives from some of the nation’s biggest banks met Monday today with President Obama. The president has reportedly asked banks to increase lending, though bank executives have asked to not oversimplify the situation so much. The government has asked banks to lower their risk levels, and it is impossible to concurrently lower risk and increase loan portfolios. As the government no longer remains an owner of any of the major banks, the discussion does not hold any real weight, as the firms have no requirement to comply with this request. The vilification of banks by many, including Obama who described bankers as “fat cats” in a “60 Minutes” interview from this past weekend will likely add more tension to the discussion as well.