Citigroup, the banking giant that is one-third owned by the US government, has been sounding out shareholders about a $15bn (£9.2bn) fundraising that could help it pay back some of the bail-out money it received from taxpayers last year.
Vikram Pandit, the group's CEO, began talks with the government after rival Bank of America last week said it was reimbursing the US Treasury and exiting the bail-out scheme. That would leave Citigroup in the somewhat uncomfortable position of being one of only two of the original bail-out recipients still in hock to the government.
Regulators at the Federal Deposit Insurance Corporation, which guarantees some $21bn of Citigroup's debt and virtually all of its $900bn of customer deposits, have cautioned against allowing the bank to exit the bail-out scheme early without being sure it has more than enough capital to withstand the recession.
The US Treasury, though, is believed to be keener on allowing Citigroup to make the repayments, but it was not clear last night whether the two sides are close to agreeing how much new capital the bank must raise.
Dick Parsons, the Citigroup chairman, told business television on Wednesday that he believed the bank was in a position to repay the bail-out money, though he cautioned that "there is an active discussion we have to have with regulators".
Citigroup received $45bn in two tranches as its losses ballooned last year, but $25bn was later converted into a 34 per cent equity stake for the US government. Complicating the picture is a side deal under which the American taxpayer has also guaranteed to absorb some losses on a $301bn portfolio of Citigroup's mortgage-related investments.
Investors have also been reacting to the bank's increased appetite for early repayment of the government. Citigroup's stock fell sharply for two days in a row, as shareholders anticipated that their holdings would be diluted by a big new equity offering. The mooted $15bn fundraising compares with Citigroup's current market capitalisation of $88bn. The bank has been examining fundraisings in the $10bn-$25bn range, it is believed.
Analysts disagree about the relative soundness of Citigroup's business, which has been battered not just by ill-fated investments in credit derivatives and mortgage-related securities but also by mounting losses on its consumer lending and credit cards.
Deutsche Bank estimated yesterday that Citigroup's year-end Tier 1 common equity capital ratio, a crucial measure of its ability to absorb losses on its assets, will be around 9 per cent if it exits the government bail-out, putting it above average for the banking sector, which stands at 7.5 per cent as a whole. But Standard & Poor's, the credit rating agency, said the quality of Citigroup's assets was below average, making the bank more risky and therefore more in need of a higher capital cushion.
Last week, Bank of America raised $19.3bn and promised to sell assets in the coming months in order to persuade regulators that it would be financially sound enough to repay the $45bn it received in two tranches of bail-out money during the credit crisis.
Banks have been eager to exit the bail-out scheme because government money comes with restrictions on what they will be allowed to pay their top executives and traders, and there has been concern that they will lose star employees to rival banks, hedge funds and other firms.