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:

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.

It's tough to make money on companies that need government handouts. Rich Greifner looks at one company with all the attributes of a successful investment.