Op-Ed: Citigroup wants to repay TARP, Fed and markets not so sure

Citigroup, the world’s biggest financial convalescent, is trying to walk on its own by repaying the TARP money it received. It’s hoping to use re-capitalization from sales and a stock offering to cover the large hole in the operational capital.

The markets are not convinced, nor is the Treasury. Theories about Citigroup’s ability to operate unassisted include some definite cynicism. One theory is that the repayment removes the corporation from the large number of apron strings related to the TARP money. Another holds that Citi’s enthusiasm for a pre-Christmas settlement of affairs is based on wanting to get the capital raising done before the holidays send major investors away until the new year. As a matter of fact Citi didn’t do too badly out of the TARP deals. As I reported some time ago, Citi cherry-picked some good assets out of the comatose Fannie Mae and Freddie Mac baskets, a transaction on the face of which didn’t require much more than a transfer of TARP funds from the Fed to the two FMs. Somebody knew what they were doing, for sure. Citi scored some upmarket properties on its asset sheet, good materials with almost no possibility of default. The group got a good deal out of a catastrophe. It’s been interesting reading the expert evaluations of people who obviously never bothered to read that information, but the doubts about Citi have one grain of actual fact in them. Citi is a huge, capital intensive, financial institution. The figure Citi has given of $15 billion as the required extra capital after sale of stocks for walking without the crutches seems more than a little parsimonious. Unless projected cash flow for 2010 is expected to be unusually rosy, that’s a janitor’s budget. The market expectation, understandably, is for an ongoing turgid credit market in 2010, which of course affects Citi’s bottom line rather negatively. The housing market is looking very slightly better, but that’s slightly better than dead and buried. Mortgage defaults, projected by some as involving a possible 6 million American families being foreclosed, (7 Americans a minute, in real time) don’t exactly ring the bells of joy for that market, either. Citi, on the other hand, has a valid point in that in terms of market image, being on the wagon while major competitors like Bank of America are coming off it, is a negative. The current situation is doing precisely nothing for its own stock prices. If Citi can function as a lender, and assist in the de-lousing of the US credit market, it should be helped to do so. It might, however, be easier to do this in credible stages, rather than lurching to vertical position after a long time in the wheelchair. If Citi wants market support, prudence dictates a position which doesn’t look overbalanced in any direction. The government and Citi should be prepared to look at belt and suspenders, not either/or scenarios, for everybody’s peace of mind.