Citigroup Out from Under TARP: Is This Really "Good" News?

by Aaron Task

Citigroup is selling $20.5 billion in stock and debt to repay the government $20 billion, leaving Wells Fargo as the last major bank still operating under TARP.

The move relieves Citi from having to deal with government-mandated compensation restrictions, as was reportedly the main impetus for Bank of America to exit from TARP earlier this month.

But very little consideration is seemingly being given to whether the banks are healthy enough and the system stable enough that exiting TARP makes practical sense, as I wrote last week.

Importantly, Citi repaying TARP will end the government's $300 billion loss-sharing agreement with the bank, meaning Citi executives and their regulators must be confident there aren't big loan losses ahead.

But as Joshua Rosner, managing director at Graham Fisher, wonders in an email Monday morning: "If Treasury is so sure that Citi, perhaps the sickest of the sick, is healthy enough to get out of TARP without a risk that they end up right back at our doorsteps again, why did Secretary Geithner ask, last week, to extend TARP until October?"

As with Rosner, other notable bank analysts like Meredith Whitney and Chris Whalen see more loan losses ahead, not less.

"You should be taking advantage of market conditions -- the markets want to buy bank stock - you sell it to 'em," IRA's Whalen said on CNBC this morning. But "until we really see what peak loan losses look like I think it'd be more prudent for the government to hold off" from letting Citi repay TARP.

In the meantime, let's hope the bears are wrong, the regulators are right and none of the big banks have to come back to the government for another bailout in the next decade, if not our lifetimes. The socio-economic consequences will be profound if -- dare I say "when?" -- they do.