Citi and the Government: Still a Close Relationship

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Jonathan Fickies / Bloomberg / Getty

Financial giant Citigroup has recently stepped up its efforts to prove to the world that the bank is on the mend. In January, CEO Vikram Pandit said his firm had made enormous progress in 2009. And in February, Citi launched a blog to note that among other things, the bank's focus is "Our Clients. Period." But there is one area where the bank says it is no longer exceptional: it's no longer taking U.S. government handouts.

In December, Citi and the feds struck a deal to get the bank out from under the government's most stringent pay rules. Citi paid back $20 billion of the money the government lent the bank, and the Treasury Department agreed to declassify Citi as one of the firms deemed to be receiving "exceptional financial assistance."

But at a time when every one of its main rivals has repaid its obligations to Uncle Sam, Citi still has its hands deep in the government-aid cookie jar. Uncle Sam owns more of Citigroup than any other bank. Currently, the government holds 7.7 billion shares of Citi's stock — a stake the government got last year by converting a portion of its Citi preferred shares. That makes Uncle Sam the bank's largest shareholder, with about 27% of Citi's outstanding shares, valued at some $26 billion. That's about seven times the $3.5 billion the government has lent SunTrust Bank and Regions Financial, the two banks with the next largest amounts of government assistance outstanding.

"The idea that Citigroup has paid back its [Troubled Asset Relief Program] money is a charade orchestrated by the government to allow an insolvent bank to pay big bonuses," says Christopher Whalen, who follows Citi and other banks at Institutional Risk Analytics. "It's a scandal."

The details of the government's role in keeping the lights on at what was once the nation's largest bank will again be on display on Thursday. For the first time, Citi's CEO will testify before the Congressional Oversight Panel (COP), set up by Congress to monitor the government's bailout of the financial system. Elizabeth Warren, a Harvard professor and longtime critic of the banking industry, heads the COP. Also testifying before the panel will be Herb Allison, who runs the Treasury Department's Troubled Asset Relief Program (TARP), the main vehicle the government has used to assist banks. Warren has said she wants Pandit to delineate how he plans to fully pay back taxpayers. A spokesperson for Warren says she has no plans to press Treasury on why Citi was allowed out of the government's most stringent pay restrictions.

Under the Emergency Economic Stabilization Act (EESA), which was passed by Congress in October 2008 and which set up the $700 billion bank-bailout fund, the Treasury Department has the ability to officially deem which firms are receiving exceptional assistance from the government. At issue is executive pay. EESA requires the Treasury Department to monitor executive pay at all the firms receiving government assistance. Last summer the Treasury said firms that are deemed to be receiving exceptional aid from the government would be subject to a pay czar. The office, later filled by high-profile lawyer Kenneth Feinberg, has the ability to set compensation for the 25 highest-paid employees at those firms. Other firms receiving government assistance are subject to much less stringent pay rules.

Treasury considers that a firm has received exceptional financial assistance if it has received government aid outside of the initial $250 billion bank bailout, in which the government injected capital into financial firms in return for preferred shares and stock warrants. The list originally included AIG, Bank of America, Chrysler, Chrysler Financial, Citi, GMAC and General Motors. But in December, Bank of America and Citigroup struck deals with the government to get off the list. Bank of America raised nearly $20 billion from investors and paid back the government the $45 billion it was lent under TARP.

Unlike the BofA deal, however, Citigroup's left intact a large investment in the bank on the part of the government. Citi repaid the government's $20 billion in Citi preferred shares, and it closed an insurance agreement that had the government backing as much as $300 billion in troubled Citi loans. But the deal did nothing to repurchase the 7.7 billions shares the government had acquired in Citi in mid-2009. The Treasury considers its remaining stake in Citi part of the Capital Purchase Program initiated at the start of the financial crisis. But because the government owns common stock and not preferred, the Citi deal is unlike any of the hundreds the Treasury has struck with other banks that have participated in the program. Nonetheless, on Dec. 23, Feinberg issued Citi a letter saying the bank would no longer be subject to his executive-pay review.

Critics contend that without the pay czar's oversight, Citi will again award outsize pay packages to its top executives. In 2008, despite steep losses at the bank, Citi reportedly paid energy trader Andy Hall $100 million. Indeed, a number of top Citi officials already seem to be cashing in on the bank's loosened pay restrictions. Earlier in the week, Citi, which lost $1.6 billion in 2009, disclosed that it had paid John Havens, widely seen as the bank's No. 2 executive, nearly $10 million in compensation for his work last year. That topped even the salary of Goldman Sachs chief executive Lloyd Blankfein, who was paid $9.6 million in 2009. Goldman, though, had profits of $13.4 billion in 2009. Alberto Verme, who for a time oversaw Citi's Dubai operations, responsible for billions of dollars in losses for the bank, was paid $7.8 million in 2009.

"Citi's CEO's salary has been cut, but there has been no trickle-down effect," says Brandon Rees, the deputy director of the office of investment at the AFL-CIO, which owns shares in Citi. "Now that they are out from under the pay czar, expect 2010 numbers to go up from here. One of the concerns we do have about companies exiting TARP is that they are just going to return to the old model of compensation."