U.S. Unloads Citi Stake for a $12 Billion Profit
"The U.S. Treasury sold the last of its Citigroup Inc. common shares in a $10.5 billion offering that capped the government's biggest bank bailout of the financial-market meltdown.
The stock sale, which was finalized Monday evening, means taxpayers will reap a profit of $12 billion on their $45 billion cash investment in Citigroup, the Treasury said. It also helps the government quell some of the criticism that it went too far in propping up the financial system and allows the bank to shake the market stigma that it has effectively been a ward of the state.
"This is a milestone for the government and for Citigroup," said James Angel, a finance professor at Georgetown University. "It signals the company has been fully privatized and that their parole is over."
The Treasury, which a year ago set plans to exit the Citigroup investment within six to 12 months, had fallen behind that target as it executed plans to "dribble out" its 7.7 billion Citigroup shares, a 27% stake, in steady sales into the market. Through October, it had sold only 4.4 billion shares.
But the results of the November election, in which Democrats lost ground in the Senate and lost control of the House of Representatives, have been interpreted as a backlash against the kind of broad government involvement in the private-sector economy that became necessary during the meltdown.
Only three weeks ago, the Treasury also stepped on the gas pedal on its plan to exit its 61% stake in General Motors Corp., boosting the size of its sale of GM stock by 36% from as little as 303.1 million shares to 412.3 million shares. People close to the agency denied the election played a role in the timing of the share sale.
"By selling all the remaining Citigroup shares today, we had an opportunity to lock in substantial profits for the taxpayer and avoid future risk," Tim Massad, Treasury's acting assistant secretary for financial stability, said in a statement. The sale also advanced the goal of "getting the government out of the business of owning stakes in private companies," he said.
In a statement, Citigroup said it "is pleased that the U.S. Department of the Treasury has finalized plans to exit from its remaining holdings of Citigroup common stock. We are very appreciative of the support provided by the UST during the financial crisis."
The Treasury's sale of 2.4 billion Citigroup shares was priced at a 10-cent discount to Monday's closing price of $4.45 a share. With the government's average cost at $3.25 a share, Treasury officials decided to accelerate the sale timetable after recent gains in the stock price meant the cost had already been recouped in sale proceeds, repayments and dividends, one of the people familiar with the matter said.
"With all the risk already off the table," the person said, "there was no reason not to go ahead with this." Counting Monday's sale, Treasury's sales proceeds averaged $4.14 per share.
The government still owns a few pieces of Citigroup. The Treasury is holding warrants for an additional 465.1 million shares as part of a pact to share losses on a pool of risky Citigroup assets. Although the Treasury expects to sell those too, the stock trades well below their conversion price, leaving their ultimate value in question. The government also owns $3 billion in Citigroup preferred stock.
The government acquired a stake of more than $52 billion in Citigroup during the market meltdown, paying $25 billion for preferred shares in October 2008 and an additional $20 billion two months later. It also received $7.1 billion in preferred shares in the loss-sharing pact in January 2009.
The bank repaid $20 billion through a stock sale late last year and exited the loss-sharing pact. The bulk of the remaining preferred shares was converted into common shares to be sold off by the Treasury. Of the eight banks that were in the original 2008 Treasury bailout, Citigroup was the only one in which the government took an investment in common shares.
But the multistep bailout took a toll on Citigroup's stock price, which tumbled from a peak of more than $55 in 2007 to below $1 by early 2009, as the bank was forced to bolster its capital by issuing so much stock that its shares outstanding ballooned from five billion in 2007 to 28.5 billion in 2009.
"This marks a winding down of the bailout," says George Ball, chairman and chief executive of boutique money manager Sanders Morris Harris Group. "Subsequent sales of government stock in banks will be much less important, viewed as objects in the rearview mirror rather than important benchmarks."
Mr. Ball added, "Treasury's actions are spurred by their desire to show that the so-called bailout is going to cost taxpayers relatively little." Citigroup is now "a simpler and more predictable animal, and that is very important to survivability."
Mr. Ball said that for a deal of this size, investors usually expect a discount of 5% or more. In this sale, led by Morgan Stanley, the discount was just 2.2%.
Georgetown's Prof. Angel warned that the course of a quick sale might not maximize gains for the taxpayer, though it could be less risky since the government is likely to lock in a gain on the overall investment.
Linus Wilson, professor of finance at University of Louisiana at Lafayette, said the government's sales strategy for the Citigroup shares worked out. "They took a risk by not selling early or selling too much at once"—which proved successful as Citigroup stock, after surging from $3 to $5 in the spring, fell back to the $3.50 level before recovering throughout the autumn.
The Treasury's decision to sell the last chunk of stock all at once also reflects a desire to move quickly. Earlier, the decision to "dribble out" shares was attributed in part to the difficulty in selling such a large stake at once. Once the Treasury sold more than five billion of its 7.7 billion shares, it became more appealing to sell its last common shares in one action without worrying about the impact on remaining holdings."0