03/18/2010 05:12 am ET Updated May 25, 2011

Citigroup Stock Sale DELAYED By Treasury Department

The Treasury Department is backing off its plans to help Citigroup free itself from partial government ownership after the markets priced Citi's shares below Treasury's cost.

Treasury was planning to sell up to $5 billion of its Citi shares at the same time the firm moved to repay some $20 billion in bailout funds. The key was issuing $17 billion of common stock. The troubled financial conglomerate felt confident that it could easily raise the funds from investors to start repaying taxpayers.

But Citigroup raised that money by selling 5.4 billion shares at $3.15 apiece, according to Bloomberg News. That's below the $3.25 price at which the government purchased its 34 percent stake.

The below-cost offer spooked Treasury, according to published reports, leading the government to back off its planned sale.

The bank told Bloomberg that Treasury won't sell any of its shares for at least 90 days. Treasury had been planning on selling all of its stake in the next 6-12 months after its initial $5 billion sale.

A leading bank analyst issued a report Tuesday questioning the bank's move to begin repaying TARP funds.

Citigroup was in a position to begin repaying taxpayers only because of the Federal Reserve's extraordinary policies adopted in the wake of the bailout, Christopher Whalen of IRA Advisory Service wrote in a report to clients. It was those policies -- not "any meaningful change or improvement in the financial condition" of the bank -- that made it possible for the bank to begin raising new funds through the capital markets. Whalen said the same applied to Bank of America and Wells Fargo.

Whalen also said the repayment would not improve Citi's situation, as it is still facing steep losses thanks to a basket of troubled loans and higher credit losses that won't fully hit the company's books until next year.

Citigroup has experienced $23.6 billion in credit losses through Sept. 30, nearly double the losses it had at this point last year, according to federal regulatory filings.

It also has about $60 billion in delinquent loans on its books, about a 58 percent increase from the same period last year, regulatory filings with the Federal Reserve show. The percentage of assets so delinquent they're no longer accruing interest is rising, suggesting that writeoffs are not far behind, further increasing the firm's losses.

UBS analysts told clients in a research note Monday that one of the "issues" with Citi's move was the fact that, "Citi's still losing money."

But perhaps most problematic for the firm is its dependence on foreign sources for funding. Foreign deposits make up 27 percent of total assets, or $510.4 billion, according to regulatory filings. Citigroup also has some $273 billion in foreign loans.

Without the protective layer of explicit government guarantees, like TARP, "important foreign constituencies may accelerate their migration away from" large U.S. banks, like Citi, Whalen wrote.

Already, two important backers have distanced themselves from the firm.

The Abu Dhabi Investment Authority, one of the world's largest sovereign wealth funds, is trying to get out of a commitment to invest $7.5 billion in the firm at an inflated share price, according to published reports this week. It filed an arbitration claim and is seeking more than $4 billion in damages.

That news comes on the heels of the Kuwait Investment Authority selling its stake in Citigroup. The fund turned a profit on its sale, but it's now no longer invested in the firm.

Whalen views that as a negative sign for the bank. "The Kuwaitis know what they're doing," he said in a recent interview.