Treasury's Rush to Sell Citigroup Shares Could Cost Taxpayers
On March 29, the Treasury Department announced that it would begin selling the 7.7 billion Citigroup shares it owns, which represent the government's 27 percent stake in the company. The move is the most significant step Treasury has taken so far in the long process of winding down the Troubled Asset Relief Program (TARP). Since selling the stock will generate more than $30 billion, a profit of at least $7 billion, many news reports are claiming it proves the bailout was a "great business" for the government. However, Treasury’s sale may be in conflict with one of TARP’s statutory goals: maximizing taxpayer returns.
In a Watcher article published in January, OMB Watch detailed how the TARP legislation imposes two imperatives on Treasury: 1) maximize the return on taxpayer money and 2) ensure economic stability. According to TARP's authorizing law, Treasury must take both goals into account in deciding when to sell assets acquired through the bank bailout program. However, Treasury's actions do not necessarily mean that it is following both of these guidelines.
A look at Citigroup’s current and historical market valuations calls into question the government’s seriousness about maximizing return on the taxpayers' investment. When Treasury announced it would sell its Citigroup shares, the stock price was about $4 per share. Three years ago, at $50 per share, it was more than ten times as high as it is today, a price that would give the government about a $325 billion profit if the stock were to return to its record high price. To put that in perspective, it would be about three times the projected ultimate cost of TARP. Citigroup's stock price has not been this low since the beginning of 1993. Given the substantial drop in Citigroup’s share price, it would appear that the firm’s stock is greatly depressed and may increase significantly with time. Alternatively, the top share price occurred when Citigroup was earning massive profits on the peak of the housing bubble, giving weight to the argument that the bank’s share prices will not reach that level for years, if ever again.
Additionally, while Treasury hasn't announced when it will start selling the stock, the process will take at least the rest of the year. During that time, the current price ($4.18 per share as of March 29) could fall below the "break-even" price of $3.25 a share. In the last three months alone, the price has fallen as low as $3.15, well below the break-even price. So while the stock price may be above $4 per share today, even a relatively small price slump could jeopardize the sale's profit margin. Unless Treasury chooses to stop the stock sale in such a situation, it could even result in taxpayers losing money on the sale.
But another factor appears to be at work: politics. The Obama administration has indicated its discomfort with maintaining a presence in the private sector, and it wants out as soon as possible. Treasury Secretary Timothy Geithner gave voice to this concern during an interview with CNBC on April 5, saying, "We don't want to be in the business of owning a share in a private company a day longer than necessary." Additionally, Treasury's announcement of the share sale came only two weeks after March 16, the earliest date Treasury could sell the stock in 2010.
President Obama also has expressed misgivings about direct ownership of corporations by the federal government, underscoring the haste to divest the government of such arrangements. But while the merits of government ownership of equity in private firms are debatable, the TARP legislation excludes these arguments as an acceptable reason for Treasury to exit the financial sector.
The bailout as a whole, and the Citigroup support specifically, are perceived as unpopular. Indeed, President Obama said that the bailout was as "popular as a root canal" during his 2010 State of the Union address. From the administration’s perspective, the sooner the bailout ends, and the sooner it no longer has an ownership stake in a large bank, the better. These concerns, the attitude within in the administration to dump all ownership of American corporations, and the intention to sell at a relatively low price, suggest that Treasury is primarily interested in untangling itself from Citigroup, rather than strictly adhering to TARP’s twin goals.
Treasury has not publicly stated whether it would stop selling Citigroup stock if the price falls significantly, but BusinessWeek quoted one bank analyst as saying, "If we get to the summer and the stock is down at $3, I think the government will continue to sell as long as the market absorbs it. The government just does not want to own the equity of these companies." If this prediction is true, the government's political unwillingness may end up costing the taxpayer over the coming year, as it leaves the potential for hundreds of billions of dollars of profit on the table.