Citigroup to repay $20B in bailout money

NEW YORK (AP) — Citigroup said Monday it is repaying $20 billion in public bailout money, freeing the banking giant from the close scrutiny and pay restrictions that came with the rescue program. The government also will sell its one-third stake in the company.

Later Monday, Wells Fargo said it plans to sell $10.4 billion in new stock to help repay all $25 billion in bailout aid it received from the government at the height of the market meltdown last fall.

Paying back the government gives an immediate lift to Citigroup’s reputation and will save the bank $1.7 billion a year in dividend payments, but it comes at a heavy cost. Raising the new capital will significantly dilute shareholders’ stake in the company, and Citi’s shares fell more than 6 percent.

By approving the repayment, the government is saying Citi is on strong-enough financial footing to stand on its own. It’s a far cry from the situation at the beginning of the year, when some analysts were saying Citi could fail completely and be taken over by the government.

Citigroup Inc. was among the hardest hit by the credit crisis and rising loan defaults and received one of the largest bailouts of any bank during the financial crisis. The government gave Citi $45 billion in loans and agreed to protect losses on nearly $300 billion in risky investments.

Freed from the bailout program, Citi will now turn its attention to shedding the rest of its troubled mortgage portfolio and other risky assets, which it had separated from its traditional banking business in January.

At the same time, the bank is trying to build up those core businesses such as securities underwriting and institutional banking, where it faces heavy competition from JPMorgan Chase & Co. and other banks that suffered less during the financial crisis. The bank also wants to build up its consumer banking business, which trails competitors like Bank of America Corp. in size.

Miller said the repayment of TARP will have the most immediate effect on the institutional business, where Citi will no longer face compensation restrictions. Those pay constraints were keeping Citi from keeping top bankers who were being lured to competitors who didn’t face similar limits, Miller said.

The repayment plan comes just days after Bank of America said it would pay back the $45 billion in bailout money it had received. San Francisco-based Wells Fargo & Co. is now the last national bank that has yet to pay back its bailout money. Most other major commercial and investment banks including JPMorgan, Morgan Stanley and Goldman Sachs have already repaid the government.

Citi will sell $20.5 billion in stock and debt to repay the bailout funds. The capital raise will dilute current shareholders by between 20 percent and 25 percent depending on the sale price of the stock and debt, Miller projected.

Citigroup has to pay back only $20 billion because the remaining $25 billion was converted into a 34 percent ownership stake in the bank earlier this year. The government plans to sell that entire stake — which has risen in value by more than 20 percent — during the next year. The loss-sharing agreement also will end as part of the plan.