Unnamed sources says Citigroup Inc. (NYSE:C) has become frustrated over the Treasury continuing to hold the shares which account for a 34 percent stake in the company, and until the government sells their shares in the company, it wouldn’t be able to pay back the $25 billion they still owe from the $45 billion they received from the Troubled Asset Relief Program.
The problem is the government owns 7.7 billion shares of Citigroup, and if it starts unloading them, it could drastically drive the share price of company down which has kept many investors from putting their money in Citigroup shares.
When Citigroup received the $45 billion in taxpayer funds in 2008, the Treasury took $25 billion of it and converted it into common stock, which has resulted in the current standoff with the bank and the Treasury.
The method Citigroup is going to use to pay off the $20 billion is to sell more stock, which in itself would dilute the value of the shares in the company, and if you add a huge sell-off of stocks by the Treasury sometime during that period, it could clobber the stock in the short and long term.
Similar to other major banks receiving taxpayer funds to survive, Citigroup’s issue isn’t the availability of cash, but how much regulators will require each bank to raise to satisfy them. With their being a very real possibility that the recession will continue on for some time, the U.S. government doesn’t want to have to go through any of this again by prematurely releasing some of the banks from what they owe by then putting the banks in even weaker and more vulnerable positions.
The decisions by the government to bail them out in the first place will probably be shown to be political suicide in the next elections, and if it were to happen again, we’d probably seen a change in the guard politically in a way unprecedented in U.S. history.
So the government is trying to cover its rear-end in order for politicians to keep from losing their jobs on a large scale.
This means the usual ratios may not apply, as Bank of America (NYSE:BAC) will probably have a ratio of about 8.5 when they pay back their TARP funds, while Wells Fargo (NYSE:WFC) could be allowed to have a lower ratio based on the reputation of their management and increasing profits. Citigroup may be required to have a higher ratio because of the disaster they are; even more so than the other banks.
Citigroup is of course trying hard to remove the stigma of the government wrapped around and within the business, as they’re the most watched in interfered bank by the government, and that doesn’t look like it’s going to end anytime soon, even if Citigroup does pay back the TARP funds, as it would still have the problem of the $301 billion they have in asset guarantees from the government, which will be in place for 10 years for residential loans and mortgaged-backed securities, while the other assets of the company will be guaranteed for a five-year period. That probably will keep them under the thumb of the government to a larger degree or another for the duration of that time, making them a very poor candidate to invest in, although there are so many variables involved, it’ll take some time to unwind it all before we really see any type of predictable events we could count on to make those decisions.
In other words, Citigroup will remain a mess and an unpredictable entity for some time to come. The first step back from that is to pay back their TARP funds, and that’s now in the hands of the government and when and how the Treasury decides to sell their shares in the company.
