Citi represents one of the government's last remaining stakes in a Wall Street giant but with all the toxic debt there is no way the government can completely pull out.
Online PR News – 31-March-2010 – – The US is preparing to sell its 27 per cent stake in Citigroup, giving a profit of $8bn to the US taxpayer.
This is a huge turnaround for Citi after it had to be rescued on three separate occasions in 2008 and 2009 and posting write downs of over $100bn.
The bank has received a total of $45bn in bail-out money from the US Treasury’s $700bn Troubled asset Relief Program (TARP). Citi was given $25bn in return for 7.7 billion shares and was loaned another $20bn which was repaid in December.
The company chosen to underwrite and advise on the sale is another TARP bail-out recipient Morgan Stanley which merged with Citigroup subsidiary Smith Barney in 2009.
Analyst Greg Valliere of Soleil Securities said a profitable exit of the government’s stake in Citi would be a “great PR victory for the Obama administration.”
CEO of Laureate BVI fund Peter Tasca, says “this sale looks good in the media but the US Treasury is still on the hook for the $306bn of toxic debt run-up by the company during the housing bubble and our analyst have estimates that Citi’s exposure to commercial debt could top $1 trillion, that’s 10 per cent of the entire US deficit, I don’t see how any company can sustain such devastating losses and stay in business, the US Treasury may be dumping the stock but they can’t do that with the debt….. any profit the tax payer realizes will be wiped out with the defaults in debt.” Tasca also said he is not a buyer of Citi or any financials at this time but would consider a position in Morgan Stanley (NYSE: MS) because the underwriting fees will definitely reflect on the “bottom line and could give the shares a nice boost.”
As Positive as this may seem, it won’t make up for TARP’s other losses, such as AIG which are estimated to equal $117bn. Tasca says, “be cautious of financials, in the US alone there have been 41 banks in 2010 that have been seized by the government, and Citi (NYSE: C) or Bank of America (NYSE: BAC) are not any different.”