Joe Public hates the bailout fund in the TARP. Banks get criticized whether they pay the TARP back or not, some rightfully so and some with very misplaced criticism. Yet the rush last week by Bank of America (BAC) to repay $45 billion in TARP funds has led many other banks to join in the rush to repay the TARP. It seems that Citigroup (C) is going to be the next big bank to repay its TARP obligations. At a sum of $45 billion, Citi needs to use extreme caution on how it goes about this repayment.

Repaying the TARP is essential for banks and other financial institutions. It allows them to operate as banks again rather than as government agencies that have to answer telephone calls all day from politicians who want faster responses than the myriad of regulators who are trying to keep the bank operations in check. Citi is not alone in its need to repay the TARP.  The question is if it is doing it too soon and if it should do it all at once.

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The upside is that this immediate payoff of the TARP would allow Citi to pay its staff what it wants without having to answer to Washington, D.C. and to Main Street. Ask Goldman Sachs (GS) how it helped them in recruiting, even if they are under a negative press flow for some $19 billion in bonuses. This also keeps Congressmen like Barney Frank and Elijah Cummings from being able to make constant demands and calls into the bank executive offices.

There is a risk of course. Banks have to maintain solid Tier-1 capital ratios, which means that they have to keep solid liquidity and effectively can’t go out making loans in the same fashion as they used to. Rochdale’s Dick Bove said Citi could technically repay the entire TARP from its cash today (north of $200 billion), but noted that the capital raise could be very dilutive to the tune of 20%, and he is not convinced that they should repay it entirely today. His figure was more like $10 billion in a capital raise, while CNBC has discussed a $20 billion capital raise. Diluting common holders is now commonplace and is sometimes viewed as a win in the current climate. But drawing too much out of the company’s treasury has severe implications that could threaten all of the new stability that has been infused over the course of 2009.

This might also push Citi’s loan activities even further and further away. The calls have been out for banks to start making loans again. Citi has already sold off assets, arguably for a song. And arguably just to appease some public pressure. The Citi of 2010 is already looking to be different from the Citi of 2007. Citi needs to repay the TARP so it can get on with its life. The problem is that rushing into a repayment at a time before solid profits are back puts the company at a risk of its financial leverage being too high, and that in turn creates the risk of debt downgrades from ratings agencies. 

Citi is going to take heat and face scrutiny one way or the other. That has been proven over and over in 2009. But imagine what happens if Citi gets Uncle Sam out of its pocket too fast and if the economy takes another dive south as some fear in 2010. If Citi thinks it has had public scrutiny during 2008 and 2009, it will be far worse if they get into trouble and need Uncle Sam’s help all over again.

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