Two of the nation's largest banking institutions have announced that they will repay the public bailout money, freeing them from the close scrutiny and pay restrictions that came with the rescue program.
Wells Fargo said Tuesday it will sell shares at $25 apiece to help repay $25 billion in bailout aid it received from the government at the height of the market meltdown last fall. The offering price is a 1.9 percent discount from Monday's closing price of $25.49.
The San Francisco bank is raising $10.65 billion by selling 426 million shares of common stock. The bank had 4.69 billion shares outstanding as of Oct. 30.
The announcement Monday from the San Francisco-based bank comes hours after Citigroup said it would repay $20 billion worth of taxpayer funds.
Wells Fargo spokeswoman said the company wasn't making the announcement out of pressure following Citigroup's move.
"We've said for quite some time that we wanted to repay at the appropriate time," she said.
Wells Fargo said it paid $1.4 billion in dividends to the government under the terms of its agreement.
The company also said it expects the plan will reduce its fourth-quarter income by $2 billion but add to its per-share earnings in 2010. Handing back the money will save the bank from paying $1.25 billion a year in preferred stock dividends.
The company plans to come up with $1.35 billion by diverting some of the money it had set aside for 2009 bonuses and by issuing its stock to company benefit plans.
Wells Fargo also plans to sell $1.5 billion in assets by the end of next year or raise more capital to reach that amount.
Repayment comes at heavy cost
Earlier Monday, Citigroup said it is repaying $20 billion in public bailout money. The government also will sell its one-third stake in the company.
Paying back the government gives an immediate lift to Citigroup's reputation and will save the bank $1.7 billion a year in dividend payments, but it comes at a heavy cost. Raising the new capital will significantly dilute current shareholders' stake in the company, and Citi's shares fell more than 6 percent.
By approving the repayment, the government is saying Citi is on strong enough financial footing to stand on its own. It's a far cry from the situation at the beginning of the year, when some analysts were saying Citi could fail completely and be taken over by the government.
"It gets rid of the stigma," FBR Capital Markets analyst Paul Miller said.
Citigroup Inc. was among the hardest hit by the credit crisis and rising loan defaults, and received one of the largest bailouts of any bank during the financial crisis. The government gave Citi $45 billion in loans and agreed to protect losses on nearly $300 billion in risky investments.
Freed from the bailout program, Citi will now turn its attention to shedding the rest of its troubled mortgage portfolio and other risky assets, which it had separated from its traditional banking business in January.
At the same time, the bank is trying to build up those core businesses such as securities underwriting and institutional banking, where it faces heavy competition from JPMorgan Chase & Co. and other banks that suffered less during the financial crisis. The bank also wants to build up its consumer banking business, which trails competitors like Bank of America Corp. in size.
Miller said the repayment of TARP will have the most immediate effect on the institutional business, where Citi will no longer face compensation restrictions. Those pay constraints were keeping Citi from keeping top bankers who were being lured to competitors who didn't face similar limits, Miller said.
Bank of America, Citi also will repay bailout
The repayment plan comes just days after Bank of America said it would pay back the $45 billion in bailout money it had received. Most other major commercial and investment banks including JPMorgan, Morgan Stanley and Goldman Sachs have already repaid the government.
Citi will sell $20.5 billion in stock and debt to repay the bailout funds. The capital raise will dilute current shareholders by between 20 percent and 25 percent depending on the sale price of the stock and debt, Miller projected.
Citigroup only has to pay back $20 billion because the remaining $25 billion was converted into a 34 percent ownership stake in the bank earlier this year. The government plans to sell that entire stake — which has risen in value by more than 20 percent — during the next year. The loss-sharing agreement will also end as part of the plan.
The Treasury Department is in line to earn about $13 billion in profit on its support for Citigroup depending on how much it makes selling the stock, said a Treasury official who spoke on condition of anonymity because he wasn't authorized to speak publicly on the issue.
Citigroup's exit from the government's rescue program is a significant milepost on the financial industry's road to recovery. Even though it's good news for Citigroup and other banks, word of Citi's repayment sent its shares down 25 cents, or 6.3 percent, to $3.70 as investors reacted to the dilution that current shareholders will incur.
Citigroup received the bailout as part of the Troubled Asset Relief Program, which was launched late last year to help ailing banks manage through the peak of the credit crisis.
Banks bristle at oversight
TARP recipients have so far paid back $116 billion in bailout money, out of a total of $453 billion that the government extended to banks, insurers, automakers and other companies under the program.
Nearly 700 banks of all sizes participated in the program. Most of the largest banks quickly paid back the money they received because it carried restrictions such as caps on executive pay and dividends. Many banks have bristled at the strict government oversight.
While the TARP repayment reduces the tight scrutiny of regulators, it also now leaves the bank more exposed to potential losses. The end of the loss-sharing agreement on about $300 billion of risky investments could hinder Citigroup's continuing efforts to maintain profitability.
Jason O'Donnell, a senior research analyst at Boenning & Scattergood Inc., said its still too early to say the "coast is clear" when it comes to losses. But by paying back the government, it shows Citi is more comfortable with projecting its own future loan losses, O'Donnell added.
The Treasury official said Citigroup never had to tap the loss-sharing agreement, and the government has taken no losses on the Citi investment. Citigroup continues to see consumer loan defaults pile up. Loan losses cost the bank $8 billion during the third quarter.
It is widely expected consumers will continue to miss payments at rapid rates in 2010 because the job market remains weak and wages are not going up. Loan defaults are likely to remain high industrywide.