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Government will sell Citi stock, reap bailout profits

NEW YORK — Bank bailouts are turning out to be great business for the government. Unfortunately for taxpayers, other federal rescues will almost certainly wind up in the red.

The Treasury Department said Monday it will begin selling its stake in Citigroup at a potential profit of about $7.5 billion — not bad for an 18-month investment.

The move is a major step in the government's effort to unravel investments it made in banks under the $700 billion Troubled Asset Relief Program at the height of the financial crisis.

Yet a year and a half after Congress passed the big bailout, other parts of it — particularly troubled automakers General Motors and Chrysler and insurer American International Group — show no signs of being profitable.

Despite the returns from Citi and other banks, analysts and even the Treasury Department predict the bailout will wind up costing taxpayers at least $100 billion. The bailouts of mortgage giants Fannie Mae and Freddie Mac, which were not included in TARP, will add billions more.

But the money the government makes off banks helps offset the damage. With the sale of the Citi shares, the eight major banks that got bailout money will have repaid the government in full. Those investments have netted the government $15.4 billion from dividends, interest and the sale of bank stock warrants, which gave the government the right to buy stock in the future at a fixed price.

Based on Monday's share price, selling its 27 percent stake in Citi would add about $7.5 billion in profits. The stock fell 3 percent to $4.18 a share Monday after news of the planned Treasury sales. But that still puts it well above the $3.25 a share the government paid. The government also still holds Citi stock warrants, which will add to its profits down the road.

Overall, it's a 14 percent rate of return on the $165 billion invested in the biggest banks. Hundreds of smaller banks also received money and have been paying the government a steady stream of dividends and interest.

By comparison, someone who invested money in the Standard & Poor's stock index in early October 2008, when the bailout was passed, would actually have lost about 3 percent.

The government's bank profits can be misleading. The banks benefited heavily from other subsidies, including the $182 billion bailout of AIG. Tens of billions went to banks that had suffered losses with AIG, and the banks didn't have to repay a penny.

Citi, one of the hardest-hit banks during the credit crisis and the recession, received a total of $45 billion in bailout money, one of the largest rescues in the TARP program.

Of the $45 billion, $25 billion was converted to the government's ownership stake in the bank. Citi repaid the other $20 billion in December.

The government received 7.7 billion shares of Citigroup in exchange for the $25 billion. It said it will sell the shares over the course of this year, depending on market conditions.

Understandably, the government will probably hold on to its shares if prices fall steeply. But Citi stock has been steadily rising with the broader market in recent months, which means the Treasury Department stands to pocket a hefty profit.

Government will sell Citi stock, reap bailout profits 03/29/10 [Last modified: Monday, March 29, 2010 9:00pm]
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