Looking to generate a profit from the junior debt trust preferred of Citigroup (NYSE:C), the U.S. Treasury Department is thinking of selling $2.2 billion worth to get back some of the bailout money the giant bank received from them in 2008.
According to an unnamed person close to the situation, the major consideration is the timing of the sale and whether the Treasury Department should sell the 27 percent stake they have in the company first or the other way around.
The key issue there is the stock in Citigroup has plunged and the losses would be over $300 million for the Treasury if they were to sell them now. For the trust preferred securities, they cost the Treasury nothing and so would bring a nice profit, as well as public relations coup to the agency.
As far as selling the trust preferred or otherwise known as Trups, that can be done at any time because they don’t fall under the 90-day moratorium the Treasury has on voting shares.
The problem, as rightly viewed by the market is the decision is entirely in the hands of the government and not Citigroup. The market doesn’t consider it relevant whether or not the Trups have voting rights as common shares do. It’s the perception of lack of any control in the matter which drags the company down.
Another problem with the Trups is Citigroup could in reality redeem them, but that would possibly result in a loss to the company, as contrary to the government, they actually have a stake in them. To lose capital at a time when Citigroup has finally increased its reserves would be counterproductive and would receive a negative reaction from the market.
The Trups came from an agreement between Citigroup and the government where they allowed the government to escape from $301 billion in risky loan guarantees by issuing $7.06 billion in preferred shares to them which ultimately were upgraded to a better class of securities, which are the Trups.
The Treasury owned $4.03 billion in the securities, and when Citigroup allowed the government to back out of the loan guarantees they were refunded $1.8 billion which has left it at the standing $2.2 billion.
Why there is a seeming discrepancy in the numbers is the FDIC also owns the Trups, holding at this time the other $3.03 billion. There has been no communication from them whether or not they’re thinking of selling them or not.
What the Treasury is struggling with is whether to sell the Trups to get some positive press about making a “profit” for the taxpayers, or to hold onto them in a move which would encourage potential investors that they can have confidence in Citigroup going forward.
Knowing politicians and the political climate, I tend to think they’ll take the poltical capital, along with the real money, rather than helping Citigroup look better.
