SAN FRANCISCO — Banking giants Wells Fargo and Citigroup both announced Monday they plan to pay the government back for bailout funds received as part of the Troubled Asset Relief Program, which was designed last year to help stabilize the financial system by giving banks a cash cushion.
The announcement Monday from San Francisco-based Wells Fargo & Co. that it plans to sell $10.4 billion in new stock to help repay all $25 billion in bailout aid it received came hours after New York-based Citigroup Inc. said it would repay $20 billion worth of taxpayer funds.
A Wells Fargo spokeswoman said the company wasn't making the announcement out of pressure following Citigroup's move.
The move will extricate Wells Fargo from the pay restrictions and close oversight that came with the bailout program. The company said it paid $1.4 billion in dividends to the government under the terms of its agreement.
Wells Fargo 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 awarding stock in place of some of the cash it had planned to use for bonuses and by issuing its stock to company benefit plans.
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.
By approving Citi's repayment, the government is saying the bank is on strong enough financial footing to stand on its own. It's a far cry from the situation at the start of the year, when some analysts were saying Citi could fail completely and be taken over by the government.
Citigroup 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 in size.
Citigroup has to pay back only $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.
Even though exit from the rescue program is 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 current shareholders will incur.
Wells Fargo made the announcement about the repayment after the closing bell on Wall Street. Its shares rose 56 cents, or 2.2 percent, to $26.05 in after-hours electronic trading. The stock ended regular trading at $25.49, a gain of 8 cents.