Uncle Sam’s Citi exit partly vindicates bailout
Uncle Sam is ready to get out of Citi. The U.S. Treasury is set to unload its 27 percent stake in the banking behemoth roughly two years after rescuing it. The exit should deliver a healthy profit for taxpayers. That’s a relief for skeptics of the bailout, and represents another financial success story for the authorities managing the crisis. But Citigroup has hardly been turned around since the government stepped in.
The sale will happen comparatively quickly for its size. Treasury has hired Morgan Stanley to trickle its 7.7 billion Citi shares into the market over the next nine months. The outline of the process will be pre-ordained to avoid the appearance of any inside knowledge or conflict on the part of the bank’s largest shareholder. At today’s price of about $4.20 a share, the government would reap a profit of roughly $7 billion on its $25 billion investment. That’s a nice paper profit, especially when put against Britain’s hefty bank investments, which remain in the red.
U.S. taxpayers have already booked some returns on their three-part bailout of Citi, and stand to make even more. The bank has paid out about $3 billion in dividends to the government. And it is scheduled to keep distributing $400 million a year on $5.1 billion of trust preferred shares that were issued to the government in exchange for insurance on toxic assets, since cancelled. Uncle Sam has warrants over another $6.5 billion of Citi stock too. These are way out of the money now, but would turn a profit if Citi stock hit their $10.61 and $17.85 strike prices within eight years.
The government’s rescue of Citi can’t, however, be considered anything close to a full success. Sure, it’ll probably turn out profitable. And the intervention got Citi to make some major changes, including identifying $850 billion of unwanted assets and operations to be unwound or sold. But some of these are proving difficult to unload. And even though Citi is performing better, the bank remains unwieldy and still looks a long way from earning enough to offset its cost of capital. There’s plenty of work yet to do to make absolutely certain Uncle Sam doesn’t have to move back in.