Treasury to Sell $2.2 Billion Citigroup Bailout Trups

The U.S. Treasury Department plans to sell $2.2 billion of Citigroup Inc. securities under a plan to lock in profits from the bank’s 2008 bailout.

The Treasury will sell the trust preferred securities, or Trups, through a public offering managed by Bank of America Corp., JPMorgan Chase & Co., Morgan Stanley, UBS AG and Wells Fargo & Co., the department said today in a statement. Citigroup will “act as global coordinator but not as an underwriter or a sales agent,” the Treasury said.

The government received the securities from Citigroup as payment for $301 billion of asset guarantees, provided to help shore up investor confidence in the New York-based bank as its shares plunged in November 2008. Citigroup, the fourth-largest U.S. bank by deposits, agreed to terminate the guarantees in December 2009. The Treasury kept $2.2 billion of the securities as compensation for the risk it took while the guarantees were in place.

“Because Treasury was never required to make any payment under the arrangement and has no further obligation to do so, all proceeds from the sale will constitute a net gain to the taxpayer under the program,” the department said.

Repaying Treasury

Trups are securities that would rank senior to common stock in a liquidation and junior to most bonds. Citigroup also received $45 billion of funds from the Treasury as part of the 2008 bailout. The department converted $25 billion of the funds into common stock last year, and the bank repaid the remaining $20 billion. As of July 1, the Treasury still held 5.1 billion of the bank’s shares, or 18 percent.

“At the initiative of the U.S. Treasury (UST), Citi has elected to remarket the entirety of the trust preferred securities held by the UST,” said Jon Diat, a Citigroup spokesman, in a statement. “We are very appreciative of the support provided by the UST during the financial crisis.”

The government is trying to show a profit on the preferred and common stakes it took in banks and other companies that got capital infusions under the $700 billion Troubled Asset Relief Program. The government holds $2.67 billion of trust-preferred securities in Ally Financial Inc., formerly known as GMAC, in addition to 56.3 percent of the auto-finance company’s common stock.

The Treasury also holds $935 million of Trups in Popular Inc., a Puerto Rican lender, a spokesman said in an e-mail today.

‘Self-Sufficient’

Today’s announcement “proves that Citigroup is increasingly self-sufficient in the private market,” said Phillip Jacoby, a senior portfolio manager with Spectrum Asset Management Inc., the biggest U.S. manager of preferred securities portfolios.

Citigroup issued a combined $7.06 billion in preferred shares to the Treasury and the Federal Deposit Insurance Corp., later upgraded to Trups. The FDIC still holds $3.03 billion, including the $800 million it is scheduled to pay to the Treasury once Citigroup repays government-guaranteed bonds sold under an FDIC emergency funding program. This figure wasn’t included in today’s offering.

The FDIC “continues to monitor the market and UST actions to support any future decisions,” said Andrew Gray, a spokesman for the agency, in an e-mailed statement.

The Trups may yield 7.875 percent until 2015 and then pay 637 basis points more than the three-month London interbank offered rate until 2040, according to a person familiar with the offering. In March, the bank sold $2 billion of Trups at a fixed 8.5 percent yield.

The U.S. Treasury may sell the securities as soon as tomorrow through a public offering managed by Bank of America Corp., JPMorgan Chase & Co., Morgan Stanley, UBS AG and Wells Fargo & Co., said the person, who declined to be identified because terms aren’t set.

Three-month Libor, a lending benchmark, is 0.29 percent. A basis point is 0.01 percent.

Citigroup shares rose 1 percent to $3.92 in New York Stock Exchange composite trading.

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

To contact the editor responsible for this story: Alec McCabe at amccabe@bloomberg.net.

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