A Tale of Two Citis: One bank explores stock sale, the other uses bail-out bonds
Citi's use of the FDIC guaranteed bond facility could complicate any talks it's having with the government about reducing the government's 34 percent stake in the bank. The last banks to tap the FDIC facility were GMAC in June and U.S. Bancorp in May. In fact, the facility is due to expire on Oct. 31, but may be extended on a case by case basis for six months. So it's a lifeline Citi may or may not be able to tap again. These bonds are cheaper for Citi than normal debt because investors will accept a lower interest rate in exchange for the government guarantee.
Most of the debt Citi has issued since the FDIC debt became available last November has been backed by the government. Citi issued a total of $49.6 billion using the FDIC guarantee program, while only issuing $15 billion in nonguaranteed debt according to Dealogic. Is Citi really ready to wean itself from government assistance? Many analysts answer that question with a big "NO."
Yet reports this week indicate that Citi is in talks with the government for a possible multibillion-dollar stock offering of new shares at the same time the government sells its shares. Reports also indicated that Citi was in talks to repay some of the borrowed TARP funds. Treasury officials don't object to the repayment, but Citi must raise the offsetting capital without government assistance.
Given that Citi needed to tap the FDIC guaranteed bond facility again Tuesday, I have a hard time believing Citi is anywhere near ready to stand on its own two feet. The bank is still dealing with increasing levels of loan defaults and still hasn't gotten tens of billions of dollars of toxic assets off its balance sheet.
Right now, the Treasury Department owns 7.7 billion shares of Citigroup stock, which the Treasury Department got when it gave Citi $45 billion in bailout funds. The deal was made last spring when doubts were raised about Citigroup's capital adequacy. Preferred shares were converted to common shares to improve Citigroup's capital position.
Some executives hope for a stock sale in the fourth quarter, but this recent move to use more FDIC bail-out bonds adds doubt to the possibility of that sale.
Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies.