Treasury's Citi Shares To Go On Sale This Year
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 Inc. at a potential profit of about $7.5 billion – not a bad haul 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 funds 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.
"Overall, TARP may cost taxpayers money. But the banking part of it is going to be a moneymaker," banking analyst Bert Ely said. "When you strip away all that emotion," he added, "this has turned out to be a good bet."
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 of that money went to banks that had suffered losses with AIG, and the banks didn't have to repay a penny.
"It's baloney to say we've made money off the bank bailouts," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund. "You have to add up all the money we've put into the economy and other firms" related to banks.
Douglas Elliott, a fellow at Brookings Institution and former investment banker at J.P. Morgan, predicted the government will lose about $100 billion on the overall bailout program. That's slightly less than Treasury's own estimate of $117 billion.
Most of those losses are for the bailouts of AIG, General Motors and Chrysler, and automaker financing arms GMAC and Chrysler Financial.
And those estimates don't include losses expected from the takeover of Fannie Mae and Freddie Mac. In September 2008, the government seized the mortgage companies and has since pumped $126 billion into them to keep the housing market from plummeting further. That number is only expected to grow, and the Obama administration has not detailed any exit strategy.
The banks have been the one bright spot in the government's portfolio. And few benefited as much from taxpayer help as Citigroup.
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.
The Treasury had been planning to sell 20 percent of its stock at the time Citi was issuing new shares late last year. At a price of $3.15 a share, the government would have lost $158.7 million on the sale, so it opted to wait.
Selling at today's prices would give the government an 18 percent return on its $45 billion investment in Citigroup, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette.
But he said taxpayers could have done even better if the government had paid market value when it bought the bank's preferred shares. Instead, it paid a hefty premium to help boost the bank's capital.
"Citigroup stands to be our most profitable bank investment, bar none," Wilson said. "But we also took the most risk with Citi."
Others say that even if the government were to lose money on the deal, it was worth it.
"It kept the recession from getting considerably worse," Brookings' Elliot said. "That's worth whatever amount we end up losing."
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AP Business Writers Daniel Wagner and Marcy Gordon in Washington and Stephen Bernard in New York contributed to this report.
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STEVENSON JACOBS 03/29/10 07:10 PM ET Associated Press