Citi’s expensive TARP exit

By Felix Salmon
December 14, 2009
paying big to exit TARP:

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Citi’s paying big to exit TARP:

The moves will result in a pre-tax loss of $10.1 billion that will likely be taken in the fourth quarter from accounting charges taken on the value of the repaid preferred shares and the cancelation of the insurance plan. The new stock offering, meanwhile, will severely dilute erode the value of existing Citigroup shares.

Once the repayment deal is completed, it will still take several more years to clean up the financial carnage. Citigroup has not posted a substantial profit in seven quarters, and the bank is expected to muddle through most of 2010 amid another wave of mortgage and credit card losses. And, like several big rivals, the bank continues to lean heavily on government support through a debt guarantee program that makes taxpayers liable if it is unable to pay back the loans.

There’s lots of talk this morning of Citi’s strong capital ratios once this deal is done. But capital ratios aren’t everything. Citi needs to become (a) smaller and (b) more profitable, while (c) being a force for good rather than evil with consumers. It’s actually doing a reasonably good job with (c): on things like overdrafts and credit-card fees Bank of America and even Chase are generally much worse, maybe because their US consumer-banking arms are so much bigger.

But Citi is still weighed down by those toxic assets that the government has put so much effort into trying and failing to get off the banks’ books. It’s selling some of them, slowly, but what it really needs to be able to do is recapitalize itself through earnings power. And there’s no sign of that happening any time soon.

Update: Citi calls to say that they’re reducing assets quickly, not slowly. They’ve put the assets they’ve marked for getting rid of into a vehicle called Citi Holdings, which includes business with about $900 billion in assets at the peak in the first quarter of 2008. That number was reduced by about $183 billion to $715 billion by the end of 2008, and today it’s $617 billion — a further reduction of almost $100 billion. More’s to come: selling Nikko Holdings will take another $25 billion off that total, and with the exit from the loss-sharing agreement with the government, Citi no longer needs Treasury approval to sell assets in the loss-sharing pool.

Still, it does seem that the low-hanging fruits — things like the Smith Barney brokerage — have largely been plucked, and that the pace of reductions in the assets at Citi Holdings is going to continue to decelerate in the quarters and years ahead, even accounting for divestitures like the upcoming IPO of Primerica. What’s more, core assets at Citicorp have been flat all year at $1 trillion, which itself is Too Big.

I’ll give this to Citi, though: at least they are shrinking, deliberately: they’re moving in the right direction. Which is not something you can say about most other too-big-to-fail banks.

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