Tags: Bank Bailout Series, Citigroup, TARP, Tim Geithner, U.S. Treasury

U.S. Treasury To Sell Citigroup Shares to Reduce the Bank's Government Reliance

By , Associate Editor, Money Morning •

The U.S. Treasury Department today (Monday) announced it would start selling up to 1.5 billion shares of Citigroup Inc. (NYSE: C) - a big step in removing government support for bailed out banks.

The Treasury owns 7.7 billion shares of Citigroup common stock, giving it 27% ownership of the bank. The sale will leave the government holding just under 22% of shares outstanding, with the rest of the shares being sold later this year.

The move brings the government closer to completely exiting the controversial and publicly criticized $700 billion Troubled Asset Relief Program (TARP).

"We're putting TARP out of its misery," Treasury Secretary Timothy F. Geithner said in an interview with CNN.

"This is going to cost us much less in fiscal terms than even the S&L crisis," Geithner said referring to the savings and loan bank collapse in the 1980s and 1990s.

Citigroup received a $45 billion bailout in late 2008 as part of TARP and the struggling bank wasn't confident in its ability to repay the entire amount in cash. The government restructured the aid package and exchanged $25 billion of preferred stock obtained from Citigroup through the Capital Purchase Program for common shares at $3.25 per share. The government still owns $5.3 billion of Citigroup's trust preferred securities.

Citigroup was one of the last of the big banks to repay its bailout funds when it returned $20 billion in December 2008. A provision of the repayment prevented the Treasury from selling the common shares for 90 days, expiring March 16. The government announced at the end of March the shares would be sold this year.

The government, aided by Morgan Stanley (NYSE: MS) on the transaction, could see profits of up to $7 billion with the sale - a 28% return - based on Citigroup's trading Monday closing price of $4.61. But that price is likely to dip before the year's end.

"The quicker the Treasury really gets this sale on, the better the chance that they'll exit with a profit. But they should expect on average there to be seven or eight days that the stock will be below $3.25," Linus Wilson, assistant professor of finance at University of Louisiana at Lafayette, told Reuters.

According to Citigroup's filing with the Securities and Exchange Commission, Morgan Stanley will get $0.003 for each share sold on an electronic trading system, and $0.0175 for each share sold through other means.

Some perceive the large offering as a vote of confidence in the markets.

"It's unprecedented to do [a stock sale] of this size right after the financial industry has been so battered," an industry official, speaking on the condition of anonymity, told The Washington Post. "It's just a very bullish sign."

Citigroup's exit from its TARP-related assistance comes as bank bailouts are under scrutiny during financial reform debates. President Barack Obama in January promised to get back "every single dime" of taxpayer money and referred to bank bonuses as "obscene" when he proposed a tax for banks to contribute to a bailout fund.

"If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers," Obama said.

About $40 billion to $50 billion in TARP loans still need to be paid back, and some recipients have spoken candidly about being far from "in good enough shape" to do so, including Milwaukee-based Marshall & Ilsley Corp. (NYSE: MI).

"I think if we called any of the powers that be about wanting to talk about our current TARP repayment strategy they would rightfully hang up on us," Greg Smith, M&I's chief financial officer, told Fortune.

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