The Government May Be Selling Its Citigroup (C) Stake Too Soon

The federal government may sell its stake in Citigroup (C) at a profits of about $8 billion, according to The Washington Post. But, a sale of the stake, about 27% of the bank’s shares, might well short change taxpayers. The financial firm’s stock was at $4.31 at the Friday close, well below its 52-week high of $5.43.

Bank analyst Dick Bove, normally a pessimist about the shares in large money center banks, recently said that he expects bank stocks to quadruple by 2012.  “The catalyst is the reduction in loan losses. That’s all that investors in banks care about,” he told BusinessWeek on March 24.

Citi’s total market cap is $122 billion now, which gives taxpayers a stake valued at $33 billion. The value of that stake would be $131 billion if Bove’s forecast proves true for Citi. The investment base that the government has in the firm, the value of its initial investment, would be a lower part of Citi’s shares if the stock was near $15. That would mean that the taxpayer’s return on the government investment would be leveraged even higher than a four fold increase in the value of the public shares.

The government’s argument for selling the shares now may be that future events could take Citi’s share lower. But the Fed and Treasury know more about the Citi  balance sheet than analysts or investors, so a sales now represents a vote of “no confidence” in the bank and the credit markets.

Treasury could wait two years until Citi’s earnings have rebounded completely. A sales which brings taxpayers $130 billion from Citi’s shares, less the government’s initial investment,  is a significant portion of the entire investment made by the TARP into American banks.

Douglas A. McIntyre