Both Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C) completed their plans to repay debt under the Troubled Asset Relief Program (TARP) which will leave both banks in a stronger position at the end of the day.
The federal government’s rescue of the American banking system has provided emergency support for banks, but with the mixed messages that the government is sending to the banking industry, both Wells Fargo and Citigroup are probably better off without help from tax payers.
Consider Citigroup’s payment of $20 billion of TARP funds on Wednesday. Citigroup used private capital and the proceeds from a stock issuance to pay off the TARP funds. The Treasury Department plans to sell its 33% stake in the bank during 2010. Wells Fargo & Co also recently repaid its debt under TARP.
Citigroup CEO Vikram Pandit said that the bank has a “debt of gratitude” to taxpayers but that the bank will be strengthened after its repayment of TARP. However, not everyone agrees with Pandit. A New York Times article recently said that the bank’s “moves will result in a $10.1 billion hit to Citigroup’s fourth-quarter results. … The new stock offering, meanwhile, will severely dilute the value of existing Citigroup shares.”
Citigroup’s repayment will also free the bank from being under certain compensation restrictions for its executive issued by the Treasury Department. Citigroup feared that compensation limitations placed on the bank by paymaster Kenneth Feinberg would cause its top executive to be scooped up by other banks with better offers. Fortunately for Citigroup, the Treasury Department said on Christmas eve that the bank would no longer be under the direction of Feinberg beginning in 2010.
The repayment news came as President Obama urged bankers to increase their lending activities, especially to small businesses and homeowners that could benefit from refinancing. However, one of the reasons that banks have limited some of their lending activities is the urging of the Treasury Department to increase capital levels. Banks remain under capitalized and could use a shot in the arm of capital as losses related to real-estate and other toxic assets mount.
Both Citigroup and Wells Fargo are certainly happy to be outside of the government’s compensation limitations and believe that they will now both be better equipped to look out for their own interests rather than trying to serve two masters—their shareholders and the federal government.
