Tarp repayment blow for Citi

US authorities are split over how much capital Citigroup should raise before it repays $20bn bail-out funds – a disagreement that is hampering the bank’s efforts to free itself from the government’s grip.

People close to the situation said the Federal Reserve, Citi’s main regulator, and the Federal Deposit Insurance Corporation, another banking watchdog that is insuring $301bn of Citi’s toxic assets, had taken a harder line than the US Treasury.

The dispute – which follows similar disagreements on the strength of Citi’s management team and board – highlights the different priorities of US banking authorities and politicians after the financial crisis.

The Fed and the FDIC, which insures savers’ deposits, are concerned about Citi’s stability and the effects that further problems would have on the financial system. The Treasury, on the other hand, has been under political pressure to get back the billions of dollars in taxpayers’ money it injected into banks during the crisis.

Sheila Bair, the FDIC chairman, recently warned that the government should be careful about letting big financial companies pay back bailout funds because such help would not be available in the future, noting that the Fed had so far been measured in its approach.

Citi, which is 34 per cent owned by the government, wants to return the funds from the troubled asset relief programme to extricate itself from the scheme’s restrictions on pay and operations.

Last week, Bank of America announced it would repay Tarp funds – leaving Citi and Wells Fargo as the only two big lenders still in the programme.

The difference in opinion threatens to scupper Citi’s plans for a swift exit from Tarp. Insiders and analysts believe the bank has about a week to launch an equity offering before its year-end financial process forces it to delay any capital raising until after its results in mid-January.

The Fed and the FDIC have argued that Citi must raise substantial levels of capital before it is allowed to repay Tarp, insiders said. At one point, a regulator told Citi it might have to raise up to $20bn in equity before paying back Tarp – a level that would make it virtually impossible for the bank to leave the programme in the short term.

The Treasury, by contrast, is believed to have taken a softer stance and has been more responsive to Citi’s arguments that it has ample cash reserves to repay Tarp without raising too much capital.

BofA agreed to raise $18.8bn to repay $45bn in Tarp funds – well below the one-to-one ratio being mooted for Citi.

Repayments from the banks have given a political boost to the Obama administration, which White House and Treasury officials are looking to exploit as they go back to Congress to ask lawmakers to finance new stimulative programmes that target jobs, infrastructure and energy projects.

Citi, the Treasury and the regulators declined to comment.

Additional reporting by Joanna Chung in New York