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How Should We Feel About the Citigroup Payback?

Maybe the way to think about it is from the perspective of a large shareholder. If you're such a person/institution, the benefits would seem to be:

*Citi no longer has to lug around the stigma of being a ward of the state, which put it at a competitive disadvantage relative to the likes of Goldman and JP Morgan.

*Citi is free of most of the government restrictions on executive pay, meaning it can pay market wages to top personnel and doesn't have to be as frantic about them jumping ship.

*Paying back the government saves Citi about $1.7 billion a year in interest payments.

The downside would seem to be:

*Even if it's returning the bailout money, and even though it's selling off its government ownership stake, it's still hard to think of Citi as something resembling a healthy bank. The high unemlpoyment rate is taking a big toll on its residential real estate portfolio; its commercial real estate assets are in pretty gruesome shape, too. So the stigma hasn't exactly disappeared--no one's going to mistake it for Goldman or JP Morgan any time soon. What's disappeared are a lot of the protections Citi (and Citi's shareholders) enjoyed. In particular, a government insurance policy covering $250 to $300 billion in troubled real estate and consumer-loan assets.

*Under the terms of the payback agreement, Citi's capital cushion will drop a little, though it'll remain relatively high. (According to the Times, the Tier 1 ratio will fall from 12.8 to 11. percent.)

*Existing shareholders will find their stake in Citi diluted as the bank issues new shares to replace the capital it's returning to the government.

*The downside of being able to pay those bigger executive salaries is, well, having to pay those bigger salaries. Obviously you want to keep the talent around. But the salaries are pretty outrageous.

*In any case, it's not even clear that paying those salaries is going to keep people around. Why work for an obviously troubled bank if you can decamp for a hedge fund? Maybe the only real stigma that's disappeared here is the stigma of poaching people from Citi.

Tallying up all the pluses and minuses, I'm not sure I'm so excited about this if I'm a big shareholder. On the other hand, one of the biggest--the Saudi prince Al-Waleed bin Talal--told the Times he's keen on the deal.