Citi's Race Against Time

Last Tuesday, I warned large bank shareholders they were at risk of share dilution. As if on cue, Bank of America (NYSE: BAC  ) announced on Thursday the largest bank capital raising in U.S. history in order to repay $45 billion in government bailout funds. That has put pressure on its closest peer, Citigroup (NYSE: C  ) , which is trying to convince the government to allow it to take similar action. Furthermore, if Citi isn't able to complete the operation within the next 10 days, it will likely have to wait until after it releases fourth-quarter results to do so. What's the hurry?

This time, it's not about capital
As the following table shows, Citigroup's Tier 1 common equity ratio is already higher than the post-TARP Bank of America:

Company Name

Tier 1 Common Equity Ratio %
(Sept. 30, 2009)

Citigroup (NYSE: C  )

9.1

Bank of America (NYSE: BAC  ) -- Pro forma, adjusted for capital actions

8.5

JPMorgan Chase (NYSE: JPM  )

8.2

US Bancorp (NYSE: USB  )

6.8

Wells Fargo (NYSE: WFC  )

5.2

Source: Bank of America presentation.

The other c-word
So why is Citigroup under such pressure to raise capital and repay the government's $20 billion TARP investment? How about US Bancorp or Wells Fargo? The latter hasn't repaid its TARP funds and both lag B of A and Citi in terms of their Tier 1 common equity ratios. The magic c-word that explains all here is compensation, not capital.

Until they repay TARP funds, banks remain subject to government supervision regarding employee compensation. That's a fundamental constraint on Citi because of its sizeable investment banking franchise; Wells and US Bancorp, on the other hand, are old-fashioned commercial banks.

Investment bankers and traders don't come cheap
All of Citi's peers in the investment banking world (B of A, JPMorgan Chase, Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) ) are out from under the government's jackboot and can pay their people whatever they choose. Bankers' and traders' Upper East Side condos and summer homes in the Hamptons aren't going to pay for themselves -- If Citi can't pay up, someone else will.

Too early?
For Citi, a capital raise is a matter of eliminating its competitive disadvantage. Of course, one could ask whether it should be in the securities business at all, given its track record. I think it was unwise on the government's part to allow B of A to repay TARP funds in an environment that still contains substantial risks for banks; that argument goes double for Citi. Hopefully, regulatory authorities won't acquiesce to the bankers' request this time -- as they have been far too willing to do in the past.

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Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2009, at 2:52 PM, megabuc wrote:

    CITIBANK IS DONE ND HAS BEEN CLOSED BY THE FED.

  • Report this Comment On December 07, 2009, at 3:07 PM, rico102st wrote:

    bank has a time to pay back tarp ,just like they like thier mortgage payments on time or they want to foreclose . let the people forclose on banks.

  • Report this Comment On December 07, 2009, at 3:11 PM, lef39 wrote:

    he Kuwaiti Investment Authority does things with monetary motivation only. Something is up with Citibank.

    I am not the only one who is wondering what the Kuwaiti’s know.

    Let me give you an example of how business oriented the Kuwaiti’s are.

    We invaded Iraq to save the Royal Family and they were the first ones to want to be paid for oil in a currency other than the dollar.

    Their motto is “It is all business”

  • Report this Comment On December 07, 2009, at 3:12 PM, lef39 wrote:

    he Kuwaiti Investment Authority does things with monetary motivation only. Something is up with Citibank.

    I am not the only one who is wondering what the Kuwaiti’s know.

    Let me give you an example of how business oriented the Kuwaiti’s are.

    We invaded Iraq to save the Royal Family and they were the first ones to want to be paid for oil in a currency other than the dollar.

    Their motto is “It is all business”

  • Report this Comment On December 07, 2009, at 3:24 PM, TMFAleph1 wrote:

    @megabuc,

    This is nonsense -- please refrain from spreading disinformation.

    Alex Dumortier

  • Report this Comment On December 07, 2009, at 3:30 PM, TMFAleph1 wrote:

    @megabuc,

    We encourage spirited discussion in the Comments section, but what you have written is patently false -- please refrain from spreading disinformation.

    Alex Dumortier

  • Report this Comment On December 07, 2009, at 11:30 PM, TARPedBanks wrote:

    The common equity ratio is only one piece of the puzzle and, arguably, one of the least important.

    C has a large common eq. ratio because it just converted something like $50 billion of preferred to common. That transaction raised exactly zero cash and changed the Tier 1 Capital ratio by exactly 0.000%. In other words, the conversion did roughly bupkus to provide a cushion for survival.

    Most importantly, even with Fed rates at zero, C has been unable to consistently run at a profit. The conversion does help there since the dividends on the preferred aren't draining cash going forward.

    The gov't still holds over $20 billion of C preferred. A capital raise may be "a matter of eliminating its competitive disadvantage," but it would be seriously dilutive to current shareholders - the biggest being the US Treasury. Before C could get out from under the gov't restrictions, it would have to buy the $20 billion of preferred and either buy or convince Treasury to auction off all that common stock.

  • Report this Comment On December 08, 2009, at 12:52 PM, joshua95926 wrote:

    Please study the facts before typing articles. US Bancorp paid back tarp funds after getting the approval of the government to do so. Yes for those of you who don't know, you must ask permission to pay back these funds.

  • Report this Comment On December 08, 2009, at 1:41 PM, AVERYLANE wrote:

    I thought the government debt was converted to common stock in Citibanks case. Is this not true? If it is, Citibank cannot get rid of the govenrment influence until the government decides. Am I missing something here?

  • Report this Comment On December 09, 2009, at 9:16 PM, rd80 wrote:

    AVERYLANE,

    Not all the government preferred was converted to common.

    $25 billion of TARP's preferred was converted. That still leaves TARP with $20 billion of preferred and there's another $7 billion of preferred held by the FDIC and the Fed as part of a asset guarantee deal.

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