Treasury Department Can’t Afford to Sell Citigroup (NYSE:C) Shares

After announced plans to work with Citigroup Inc. (NYSE:C) to pay back the funds it received from taxpayers via the TARP program, the Treasury Department in a humiliating move had to back out of the deal to sell up to $5 billion of stock it has in the company on behalf of taxpayers because they would have taken a big loss if they had done it. Makes you wonder why they didn’t think of that before they announced the deal.

One of the key problems (although not the only one) was Wells Fargo (NYSE:WFC) moving quickly to sell its shares to raise $10.4 billion to help pay off the $25 billion in TARP funds they owed. The fast move by Wells Fargo positioned them to outmaneuver Citibank, guaranteeing they could generate the wanted sales, which took much of the thunder out of Citibank’s share offering, along with the demand from investors to buy them.

Now that Citigroup is the largest remaining bank to owe TARP funds, this will continue to be a negative against them as they try to convince institutional investors to view them with favor. They will evidently have to wait at least a year before the Treasury unloads its shares in the giant bank, as they’ve said they’re going to sell their shares over a 12-month period rather than in an immediate sale, as they originally stated.

A battle over the share price of Citigroup emerged between investors and the government, where investors pressed for a price below what the Treasury Department paid for the shares, which have resulted in a loss. Picture the Treasury explaining to the American people how they lost billions through the sale of their shares in Citigroup; the reason the Treasury pulled out of the deal.

Citigroup is in the worst shape of all the major banks, and investors have been leery of how much earnings or profits the company can really generate in the short term. Consequently, Citigroup was forced to offer a price of $3.15 a share to the Treasury, which was 10 cents under what they paid for them. The Treasury owns 7.7 billion shares in Citigroup, equal to 34 percent of the company.

Losses in the deal would have come in at $770 million for the Treasury if they had went through with the deal. Government shares will be held for a minimum of 90 days according to a deal worked out with institutional investors.

Other issues were the dilution of stock, which will always discourage big investors in a company, as the value can be held down for years before it rebounds as a consequence of issuing large shares of common stock for sale.

There is no doubt now that Citigroup is in for a long, painful period of time where they’ll be looked upon as the weakest link among the large banks still surviving. This will have significant impact on hiring quality people and in generating interest in larger investors taking interest in the company.

This was why there was such a rush to make the deal happen, but also why it was squelched as well.

Again, this shows why the government has no business in interfering with the market and propping up companies. The Treasury was made to look like the fools they were by not being able to read the simple circumstances surrounding Citigroup which would obviously disallowed any of this going forward it the market was left alone to decide, which it ultimately did by rejecting the price wanted by the government for its shares in Citigroup, which would have had to been artificially raised to make the deal work.