Citigroup Inc (NYSE: C) Shares Drop 7% as Treasury Holds On to Shares

In a somewhat surprising move late Wednesday, the Treasury Department backed away from an initial plan to sell some of its shares in Citigroup Inc. (C).

Shortly after the announcement, shares in Citigroup, Inc dropped almost 7% to $3.22 on heavy volume.

Citigroup said late Wednesday that Treasury decided not to sell any of its stock in connection with the bank’s offerings. The bank also announced that Treasury agreed to extend its lock-up period on the sale of its common equity stake of 7.7 billion shares in Citigroup to 90 days from 45 days after the completion of the offerings.

A statement released earlier this week, had led many investors to believe that the Treasury would sell up to $5 billion of its Citigroup shares when the bank completed its new stock offering.

The decision by the Treasury Department deals a blow to the government’s effort s to reduce its involvement in the financial-services industry.

However, Citigroup did report that it successfully raised the roughly $20.5 billion the financial-services giant needed to exit the Troubled Asset Relief Program, or TARP.  

The details include Citigroup generating net proceeds of about $17 million on the sale of 5.4 billion new common shares at a price of $3.15 each.

To raise the other 3.5 billion, the bank sold 35 million tangible equity units at $100 each. About $2.8 billion of that will count as new equity for the company.

The money will help the bank repurchase $20 billion of trust preferred securities issued to the Treasury via TARP.

After that deal closes, and Citigroup unwinds a big loss-sharing agreement with the government, it said it won’t be considered a recipient of “exceptional financial assistance” under TARP. That’s important because it will free the company from strict compensation limits which could have put it at a disadvantage versus rivals that have already exited the program.

Citigroup has been one of the biggest recipients of government support since the financial-services giant almost collapsed in the wake of last year’s credit crisis. The ordeal left the company 34% owned by taxpayers.

Treasury expects to sell the government’s 34% stake in Citigroup shares over the next 12 months, a person familiar with the matter said late Wednesday. Earlier this week, the plan was to sell the stake over the next six to 12 months.