Citi is still stuck in TARP, but the program may cost $200 billion less
But there's good news for Main Street: Now that many of the biggest banks have repaid their TARP loans, the Obama administration plans to cut the projected long-term cost of TARP by $200 billion, which leaves room for a new jobs program.
At first, the administration said it wanted to use the leftover TARP money for deficit reduction, but with unemployment still at 10%, there's a lot of pressure from Democrats in Congress to enact jobs legislation. It's about time for Main Street to get more attention, now that Wall Street is back to making billions and paying its employees billions in compensation and bonuses. President Obama may introduce a new jobs bill on Tuesday.
But poor Citigroup (C) got a big no on its idea for the U.S. Treasury starting to sell the shares now owned by the government. Treasury officials fear that a sale of 7.7 billion government-owned Citigroup shares could weaken investor demand if Citigroup needs to raise capital. Citigroup executives have been pushing the government sell to its 34% stake in the bank as the first step in its exit from TARP. They desperately want to escape the government-imposed pay limits because they fear they will lose valuable employees who can make more money with the non-TARP banks.
In a related story, the Kuwait Investment Authority sold its stake in Citigroup for $4.1 billion, earning a $1.1 billion profit. Selling off that stake did push the value of Citigroup shares down to $4 in European trading from its $4.06 close in New York on Friday.
Another Crisis Brewing for Regional Banks
Behind the scenes, the Treasury department has started pushing regulators to talk with all large banks about their plans to exit TARP. Regional banks won't likely feel ready to leave the program soon, because they face a growing new problem -- mounting defaults on commercial property. Those banks will probably wait until 2011 to start exiting TARP, which will give them time to determine how rising defaults on malls, hotels, apartments and home developments will impact their balance sheets.
Commercial defaults stood at a 16-year high of 3.4% in the third quarter and could reach as high as 5.3% in two years, according to Real Estate Econometrics. Regional banks are almost four times more concentrated in commercial property than the big banks. So as the commercial defaults increase, more regional banks will be at risk.
Wells Fargo (WFC), the largest TARP-assisted bank left other than Citigroup, doesn't feel the same pressure as Citigroup to escape from the government's grasp. It was able to avoid government control over its compensation packages because it didn't take a second helping from TARP, as Citigroup and Bank of America needed to do. Wells Fargo does have $25 billion in TARP funds, but they were received during the first round of bailouts, when no rules on compensation were imposed.
Once Bank of America (BAC) repays its $45 billion, Citigroup will be the bank using the largest amount of government life support. In addition to the government's large ownership stake, Citigroup still has $20 billion it will have to repay. It also has $301 billion of devalued securities, mortgages, auto loans, commercial real estate and other assets guaranteed by the Treasury, FDIC and the Federal Reserve.
So Citigroup is a long way from being deemed healthy enough to stand on its own. Don't expect to hear about a TARP exit plan for the bank any time soon.
Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and Trading for Dummies.