Citigroup's (C) rush to repay its bailout money to the government is bad for the company and bad for shareholders, writes James Kwak in the excellent Baseline Scenario blog.

"This is another example of a bank doing something stupid in order to say that it is no longer receiving TARP money, and probably more importantly so it can escape executive compensation restrictions," Kwak writes.

To get out from under TARP, Citi will sell $17 billion in common stock. That move certainly has a higher cost of equity than paying an 8% interest rate on the $20 billion in preferred shares that Citi is buying back from the Treasury, Kwak writes.

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No wonder investors reacted badly.

"The stock price fell because existing shareholders are guessing that the dilution they suffered (because new shares were issued) will more than compensate for the fact that Citi no longer has to pay dividends to Treasury," he adds.

Citigroup will also be weaker after paying back that money. It will have $20 billion less in cash to deal with future problems, Kwak writes.

But regulators likely allowed Citi to repay the money because it can't very well say yes to Bank of America (BAC) and no to Citigroup, Kwak writes. Also, the government gets more ammunition for its TARP-was-a-success message.

But at least the taxpayers get their money back, Kwak adds.

The risk that Citigroup will come back for a future bailout has gone up, which is bad; but I believe that if such a bailout ever happens, it will have to be on draconian terms–a government takeover in which management is fired, shareholders are wiped out, and the company is broken into pieces and sold off.