Citigroup, Wells Fargo repay gov't bailout funds

AP News
Posted: Dec 14, 2009 8:25 PM

Citigroup Inc. and Wells Fargo & Co. said Monday they would repay their government bailout loans, freeing them from close regulatory scrutiny and marking the latest step toward recovery for the U.S. financial system.

Citigroup, whose future looked uncertain as recently as the beginning of this year, will repay $20 billion, while Wells Fargo will repay the $25 billion it received. Both banks announced significant capital raises in order to repay the money, and the government will also sell the one-third stake it holds in Citigroup.

The two are the last major national banks to exit the Troubled Asset Relief Program, which the government put in place at the height of the financial crisis in the fall of 2008.

Most other national banks have already exited the program, releasing them from strict compensation limits that banks had said were impeding their ability to attract and retain talent. Just last week Bank of America Corp. said it would repay the $45 billion it owed, just as it's trying to find a new CEO to replace Ken Lewis, who is retiring at the end of the year.

New York-based Citigroup is far larger than Wells Fargo, which is based in San Francisco, and the government took a bigger role in its oversight. Citigroup had taken a total of $45 billion in rescue funds _ among the largest bailout packages received by any bank _ but the government converted $25 billion of that amount into the 34 percent equity stake, which it is now selling.

Allowing the banks to repay the funds and exit TARP, as the bailout program is known, signals a vote of confidence from the government in the ability of both banks to stand on their own. It's a far cry from the situation at the beginning of the year, when some analysts were saying Citi could fail and be taken completely over by the government.

"It gets rid of the stigma" for Citi, FBR Capital Markets analyst Paul Miller said.

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.

The bank's shares fell 6.3 percent Monday as investors reacted to the news that existing Citigroup shareholders' stakes would be diluted by the capital raise.

Wells Fargo said it plans to sell $10.4 billion in new stock. Its announcement came after the close of stock trading, although its shares rose 2 percent in after-hours trading.

The pledges to repay the government came on the day top bankers met with President Barack Obama at the White House. He asked them to consider "every responsible way" to boost lending, particularly to small businesses, and to get behind an overhaul of financial regulation.

Citigroup was among the hardest hit by the credit crisis and rising loan defaults and received a major package of government aid. In addition to giving Citi $45 billion in loans, the government also agreed to protect losses on nearly $300 billion in the bank's risky investments.

Now that it's repaid its government loans, 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.

The Treasury Department said that of the $245 billion given to banks under the TARP program, more than $185 billion will have been repaid including the money from Citigroup and Wells Fargo. Other companies including automakers and insurers also received money under TARP.


AP Business Writer Ieva M. Augstums in Charlotte, N.C. and AP Economics Writer Martin Crutsinger in Washington contributed to this report.