Citigroup Shouldn't Rush to Pay Back TARP

NEW YORK ( TheStreet) -- Citigroup ( C) should keep trudging through the sludge toward its goals of becoming a slimmer bank and working through large consumer credit losses without being distracted by Bank of America's ( BAC) plan to pay back $45 billion in bailout funds.

Citigroup has been back above the fold in recent days as media outlets speculate when and how the ailing institution will break free from its TARP shackles, given Bank of America's surprising announcement last week.

According to media reports on Monday, Citigroup, which also received $45 billion worth of bailout funds, has little more than a week to begin a capital-raising effort to repay government-owned trust preferred securities, otherwise it will have to wait until after it reports its fourth-quarter results in mid-January.

The Treasury Department owns 33% of Citigroup's common equity through a conversion of $25 billion worth of preferred stock earlier this year. That stake, originally part of the company's TARP funding, is now the government's to sell. What's left for Citigroup to repay is about $27 billion worth of trust preferred securities ($7 billion of which is associated with the asset guarantee program Citigroup agreed to last year) and roughly $465 million in warrants associated with its investment, according to David Trone, an analyst at Macquarie Capital.

CEO Vikram Pandit has said that paying back TARP is a priority for the company along with returning to "sustained profitability." Reports have come out recently noting that Citigroup's management is growing frustrated by being restricted from paying back the TARP funds.

At present, the company does not have the resources to buy the preferred stake back and would likely have to raise $6 billion in common equity, Trone estimates, a move that would further dilute shareholders.

The government's stake in Citigroup's common equity is another story and will likely be sold via secondary offerings next year, Trone believes. Some critics say the government should begin selling that stake immediately, given its $6 billion paper profit, according to Bloomberg.

But from Citigroup's point of view, at least with regard to the preferred stake, what's the big rush? Is one month, two months, or whenever the company gets a green light from the government to begin paying back the funds really going to matter that much in the long term? Furthermore, is it really the best move for shareholders if the company is doing it for the sake of appearances?

On the one hand, once Bank of America pays back TARP, Citigroup will be one of the last remaining large institutions to still be under the government's grasp along with Wells Fargo ( WFC), as Goldman Sachs ( GS), JPMorgan Chase ( JPM) and Morgan Stanley ( MS) have all repaid TARP funds.

But, while TARP status is bound to be detrimental to holding onto top talent at some point, Citigroup isn't facing a deadline to replace its CEO like Bank of America is with Ken Lewis, so this just isn't a pressing issue for the company.

Instead, Citigroup should simply continue to shrink by working to sell non-strategic assets and businesses, stop the bleeding when it comes to massive credit losses from soured mortgages and credit card loans, and make sure the company is on sound footing before rushing to pay back government funds. Leave the business of TARP repayment to next year.

--Written by Laurie Kulikowski in New York.

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