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Citigroup: The Problem That Won't Go Away


The bank still doesn't get it.

Ho, ho, ho -- Santa Claus seems to have swung by Wall Street a bit early this year.

The Washington Post reports, "The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup (C) as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis."

How generous of them.

When I received a notice from the IRS in my mailbox this November, informing me that I underpaid the government by $300 back in 2003, I was rattled. I didn't sleep until I was able to get my accountant on the phone the next morning. As it turned out, the taxman owed me money. But then, I'm just a regular guy. Not a bank.

If I was a bank, maybe our vaunted Internal Revenue Service would have seen the situation through a different lens and changed the law for me, too.

On Friday, the agency issued an exception to long-standing tax rules for the benefit of Citigroup and a few other banks partially owned by the government, owners that include you, me, and anyone else who less-than-willingly donates a significant portion of their income to Uncle Sam, the largest employer in the United States. As a result, Citigroup will be allowed to retain $38 billion in tax breaks.

"The government is consciously forfeiting future tax revenues. It's another form of assistance, maybe not as obvious as direct assistance but certainly another form," said Robert Willens, an accounting expert. "I've been doing taxes for almost 40 years, and I've never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts."

"It all seems to be a bit of accounting sleight of hand, where the taxpayer yet again loses with this administration," said Rep. Jeb Hensarling, R-Texas.

It's official -- we have now entered the Age of the Surreal. Is anybody home at Citigroup? Does anyone there read the papers? The public backlash would likely be less extreme if, in the words of Minyanville's Kevin Depew, CEO Vikram Pandit simply ate a poor person on live television during prime time.

What's going on here? Citigroup is the last of the four largest US banks -- Bank of America (BAC), Wells Fargo (WFC), and JPMorgan Chase (JPM) being the others -- to repay its TARP funds. It did so by selling newly created shares of stock for a price so low that the US put off plans to shed its stake in the firm -- $25 billion in common stock in Citigroup, along with a $20 billion preferred equity stake and preferred shares granted in conjunction with an asset-guarantee agreement.
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No positions in stocks mentioned.
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