Remember that $700 billion Troubled Asset Recovery Program? It turns out that plenty of assets are still troubled, and there's been very little recovery of them. But many of the big banks that took TARP money from the government have been able to pay it back.

And the reason they did is simple. Their top people want to make more money, and it doesn't help Washington if TARP bank executives are taking millions from taxpayers a year after they nearly brought the world financial system to its knees. A recent Bloomberg News poll shows that 66% of Americans have an unfavorable view of financial executives, and 75% think they shouldn't get bonuses.

This brings to mind Citigroup (C), which got $45 billion in TARP funding -- $25 billion of which the U.S. has converted into common shares, according to BusinessWeek -- and another $301 billion in government guarantees against losses from bad mortgages. Citi had to sell its Phibro oil-trading unit so it could avoid the firestorm that would have ensued if it had paid Andrew Hall, Phibro's top trader, the $100 million bonus he was due to collect.

Citi wants to make those kinds of bonus payments without the annoyance of responding to public rage. So it's eager to find a way to throw back the remaining $20 billion TARP funds to the government. But CEO Vikram Pandit has had his troubles with FDIC Chair Sheila Bair, who wanted to see him replaced. And the U.S. isn't going to let Citi out of TARP without coming up with a way of dealing with those $301 billion in sick assets, according to BusinessWeek.

"People Will Think It's a Great Deal"

And this brings us to the key thing that Citi would need to do to escape the government yoke. It needs to raise capital, because what it has seems to be declining. It stood at 11% of assets on Dec. 9 after raising new money and repaying TARP. BusinessWeek reports that's down from 12.5% on Sept. 30.

So the answer for Citi appears to be raising about $20 billion in new capital from investors. That funding could come in the form of $10 billion in equity and $10 billion of other securities. At about $4 a share, Citi is trading at a significant discount to the assets on its books. And one analyst told BusinessWeek: "People will think it's a great deal."

Problem is, the books are probably wildly optimistic. Citi hold many complex assets with the potential for becoming toxic. And don't forget the assets off Citi's books -- called special purpose entities (SPEs), which helped wipe out Enron. Citi has $996.6 billion worth of SPEs. I'm not sure we can be confident that these will not blow up -- particularly considering that they consist of highly risky paper from student loans, subprime mortgages and credit card receivables.

Considering the troubled assets Citi is holding that have yet to recover, if the U.S. lets it sucker some investors into buying equity so it can pay back the $20 billion TARP -- and go back to the days of high risk and huge bonuses -- taxpayers will end up being saddled with a bigger bill further down the road.

Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He owns Citigroup shares.

Meet Peter Cohan at The World Money Show Orlando, February 3-6, 2010 at The Gaylord Palms Resort.


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