Citi To Repay Federal Loans; Government To Also Sell Its Stake ... At 20% Profit

Wash Post:

Citigroup Inc. said Monday it is repaying $20 billion in bailout money it received from the Treasury Department, in an effort to reduce government influence over the banking giant. The government will also sell its stake in the company.

The New York-based bank was among the hardest hit by the credit crisis and rising loan defaults. It has received one of the largest bailouts of any banks during the financial crisis. The government gave it $45 billion in loans and agreed to protect losses on nearly $300 billion in risky investments.

Citi, though, only has to pay back $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 will also end as part of the plan.

Repaying the bailout means Citi will no longer face heavy scrutiny and restrictions from the government, including caps on executive pay and dividends. However, the repayment comes at a heavy cost. Raising the new capital will significantly dilute current shareholders' stake in the company.

Citi shares fell 7 cents to $3.88 in premarket trading Monday.

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

While the government believes in the strength of Citi, the bank is still facing losses and trying to streamline operations to maintain profitability that has been tenuous throughout the year, even as other big banks recovered.