NEW YORK - Two of the nation's biggest banks - Citigroup Inc. and Wells Fargo & Co. - yesterday said they would repay the government a combined $45 billion in public bailout money that they received during the nation's financial meltdown a year ago.
The repayment would free the banking giants from the scrutiny and pay restrictions that came with the rescue program.
Citigroup said yesterday it was repaying $20 billion. Later, San Francisco-based Wells Fargo said it planned to sell $10.4 billion in new stock to help repay all its $25 billion in bailout aid.
A Wells Fargo spokeswoman said the company wasn't making the announcement out of pressure from Citigroup's move.
"We've said for quite some time that we wanted to repay at the appropriate time," she said.
Wells Fargo's move will extricate it from the pay restrictions and close oversight that came with the bailout program. The company said it paid $1.4 billion in dividends to the government under the terms of its agreement.
Wells Fargo said it planned to come up with $1.35 billion by diverting some of the money it had set aside for 2009 bonuses and by selling its stock to company benefit plans.
It also plans to sell $1.5 billion in assets by the end of next year or raise more capital to reach that amount.
The government said it would sell its one-third stake in Citigroup and expects a net profit of $13 billion from its investment.
Paying back the government gives an immediate lift to Citigroup's reputation and will save the bank $1.7 billion a year in dividend payments, but it comes at a heavy cost. Raising the capital to repay the U.S. Treasury will significantly dilute current shareholders' stake in the company, and Citi's shares fell more than 6 percent yesterday.
By approving the repayment, the government is saying Citi is on strong enough financial footing to stand on its own. It's a far cry from the situation at the beginning of the year, when some analysts were saying Citi could fail.
"It gets rid of the stigma," FBR Capital Markets analyst Paul Miller said.
Citigroup was among the banks hardest-hit by the credit crisis and rising loan defaults, and it received one of the largest bailouts during the financial crisis. The government gave Citi $45 billion in loans and agreed to protect losses on nearly $300 billion in risky investments.
Of the $45 billion, $25 billion was converted into stock, giving the government the one-third stake in Citigroup.
Freed from the bailout program, Citi will now turn its attention to shedding the rest of its troubled mortgage portfolio and other risky assets, which it had separated from its traditional banking business in January.
At the same time, the bank is trying to build up those core businesses such as securities underwriting and institutional banking, where it faces heavy competition from JPMorgan Chase & Co. and other banks that suffered less during the financial crisis. The bank also wants to build up its consumer banking business, which trails competitors like Bank of America Corp. in size.
Miller said the repayment of money from the Troubled Asset Program will have the most immediate effect on the institutional business, where Citi will no longer face compensation restrictions. Those pay constraints were keeping Citi from retaining top bankers who were being lured to competitors who didn't face similar limits, Miller said.
TARP began in October 2008 when then-Treasury Secretary Henry Paulson persuaded nine of the biggest banks to sell $125 billion in preferred stock to the government to stabilize the financial system.
The banks' repayment plan comes just days after Bank of America said it would pay back the $45 billion in bailout money it had received.
Citi will sell $20.5 billion in stock and debt to repay the bailout funds. That will dilute current shareholders' equity by between 20 percent and 25 percent depending on the sale price of the stock and debt, Miller projected.