Citibank to Pay Back $8 Billion
Cited: Washington Post
In the federal rescue of banks, Citigroup was the biggest recipient. Now the US is set to receive $8 million from bailing them out. According to industry and federal sources, the Obama administration is also making final preparations to sell its stake in the New York bank.
At today’s prices, the sale would net more than $8 billion, by far the largest profit returned from any firm that accepted bailout funds and the transaction would be the second-largest stock sale in history.
On paper, the government’s 27 percent stake has grown in value to $33 billion. The size of the deal in the works has Wall Street buzzing. Only the stock offering by Japan’s Nippon Telegraph and Telephone, which raised $36.8 billion in 1987, was larger, according to Thomson Reuters.
Leading financial firms, including J.P. Morgan Chase, Morgan Stanley and Goldman Sachs, are vying to be chosen as the deal’s underwriters to gain the prestige of managing a historic stock sale as well as the fees from investors who buy the shares.
To improve their chances, some banks, such as Goldman Sachs, are offering their services to the Treasury Department at almost no cost, industry officials familiar with the matter said.
Sign of bailout’s success
The windfall expected from the stock sale would amount to a validation of the rescue plan adopted by government officials during the height of the financial panic, when the banking system neared the brink of collapse.
A year ago, Citigroup’s stock hovered around a dollar a share and the bank’s future seemed in doubt. On March 23, the stock closed at $4.31.
If the sale proceeds as planned, Citigroup would be able to cut nearly all of its ties to the $700 billion Troubled Assets Relief Program. Meanwhile, the administration could highlight the profit generated from the rescue of big banks.
“It’s unprecedented to do [a stock sale] of this size right after the financial industry has been so battered,” said an industry official who spoke on the condition of anonymity because he was not authorized to comment publicly. “It’s just a very bullish sign.”
The Treasury, as well as the Wall Street firms, declined to comment on the stock sale.
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Citigroup’s performance has lagged behind its rivals in Lower Manhattan. In January, the company announced a $1.6 billion loss for 2009. By comparison, J.P. Morgan Chase earned $11.7 billion. But Citigroup’s executives said at the time that they saw its business stabilizing, allowing the company to set aside less money in the last three months of 2009 to cover losses than it did for the same period of 2008.
Citigroup was among nine major banks that were the first to take bailout funds in October 2008, and all have returned their federal loans. In addition to these repayments, the Treasury has received interest, dividends and about $3.5 billion from the sale of warrants, which are contracts allowing a holder to buy a company’s stock in the future.
Lower than expected costs
The true cost of rescuing the financial system, however, is not yet known. Senior Treasury officials have said that they expect the ultimate cost of TARP to be less than $100 billion. Besides TARP programs, mortgage financiers Fannie Mae and Freddie Mac have received more than $125 billion in federal aid. There is no indication that either firm will be able to repay the government anytime soon.
Yet many economists say that rescuing large Wall Street firms has come at a much lower cost than expected.
During the height of the financial crisis in October and November of 2008, Citigroup got more than $45 billion in federal aid in exchange for preferred shares. The government later restructured that package. Officials converted $20 billion into a loan, and the remaining $25 billion was converted in September into common stock at the price of $3.25 a share.
Citigroup was the only bank that gave common shares to the government, because the firm was in worse shape than its rivals and couldn’t promise to repay its aid entirely in cash.
In December, the bank announced it would raise money from investors to repay the $20 billion loan. The Treasury said at that time that it would sell its Citigroup shares in phases this year, beginning with a $5 billion deal. The value of the government’s stake had grown to $33.1 billion at the end of regular trading March 23.
Citigroup diluted the value of its stock that was held by existing stockholders by issuing stock and giving it to the government last year. However, a reverse stock split to enhance the value of shares could be ratified by the company. In fact, the bank’s stockholders did approve a proposal by the board of directors to speed a stock reverse split before June 30 last fall.
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My Take: Okay, I can understand the shares part of the deal with Citigroup. However, if they are losing money, how can they pay back the $20 billion loan? If I understand this correctly, this has nothing to do with commercial mortgage loans and that it is a straightforward business loan. I would imagine that as long as they keep the interest paid up, that would keep them from defaulting on it. I just worry that they are losing money and will not be able to pay back.
Maybe the government would have been better off with commercial mortgages on all the banks they helped out. At least that way they would have property to sell to recoup any losses. Maybe these banks should get into one of the many debt settlement services to help them out. They always complain about the average Joe citizen not paying their bills and getting into a debt settlement program. Why shouldn’t they follow their own advice?
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