Citigroup Stake Is Sold for About $10.5 Billion as U.S. Unwinds Investment

The U.S. Treasury Department sold its remaining stock in Citigroup Inc. for $10.5 billion, bringing the country’s third-biggest bank a step closer to independence from the government following a $45 billion bailout in 2008.

The Treasury said it disposed of 2.4 billion shares at $4.35 each, compared with yesterday’s closing price of $4.45 on the New York Stock Exchange. The sale raises the profit for taxpayers on the rescue to about $12 billion, including the share gain, dividends and proceeds from other securities.

The sale helps Citigroup exit the 2008 bailout, which was provided to keep the New York-based bank from collapsing as its stock sank below $5 and some depositors started withdrawing their money. Citigroup also had to get $301 billion of government guarantees on its riskiest assets, making the bailout the biggest among U.S. banks.

“We’re seeing a form of governmental handcuffs being released,” Bill Bradway, founder of banking consultant Bradway Research LLC in Framingham, Massachusetts, said before the announcement. “Citi will be basically disentangling itself from direct ownership from the government, and the government is cashing out.”

Citigroup shares advanced 15 cents to $4.60 at 12:57 p.m. in New York Stock Exchange composite trading. They rallied 34 percent this year through yesterday, though remain down about 92 percent from their December 2006 high of $56.41. Bank of America Corp., the biggest U.S. bank by assets, has declined 23 percent this year while JPMorgan Chase & Co., the second-biggest, fell about 4 percent.

‘Substantial Profits’

“We had an opportunity to lock in substantial profits for the taxpayer and avoid future risk,” Tim Massad, acting assistant secretary for financial stability, said in the government statement.

The Treasury said its average price for selling 7.7 billion Citigroup shares was $4.14. The government acquired the shares at a conversion price of $3.25. The share increase produced a gain of about $6.85 billion.

The U.S. has been winding down bank-bailout and emergency- lending programs while trying to recoup the money it provided to bolster private companies including General Motors Co. and American International Group Inc.

The Treasury received $13.6 billion from last month’s initial public stock offering by Detroit-based General Motors, and still holds about 33 percent of the automaker. The government said in September it plans to convert $49.1 billion of AIG preferred shares into common stock that would eventually be sold in the open market.

Government’s Stake

The government stake in Citigroup came from converting $25 billion of money from the Treasury’s Troubled Asset Relief Program into common stock at $3.25 a share. The 7.7 billion shares equated to a 27 percent stake. Morgan Stanley, which had been selling down Citigroup’s stake in the open market since April, underwrote the sale of the final installment, according to the Treasury.

“This sale marks the end of the assistance given to Citi by the government through TARP,” Chief Executive Officer Vikram Pandit, 53, wrote today in a memo to staff. “In a year full of milestones in the transformation of our bank, this one may be the most important.”

In an appearance today in Johannesburg, Pandit also said he was “thankful” for the assistance of U.S. taxpayers.

Warrants Held

The Treasury still owns warrants on 465.1 million Citigroup shares, and the Federal Deposit Insurance Corp. holds $800 million of the bank’s trust-preferred securities on behalf of the Treasury, according to a regulatory filing.

In October, the Treasury sold another $2.2 billion of the trust preferreds, which Citigroup had delivered to the government as compensation for the asset guarantees. The bank also paid about $3 billion of dividends to the government on its preferred shares.

Because of the new stock Citigroup issued to raise capital and satisfy the government, the number of shares outstanding ballooned to about 29 billion from about 5.5 billion, diluting shareholders by more than 80 percent.

This week’s offering may help lure back investors who were worried that the stock might be pressured by the Treasury’s sales or leery of investing alongside the government, said Gary Townsend, president of the investment firm Hill-Townsend Capital LLC in Chevy Chase, Maryland.

Profit Expected

“This now puts the shares into hands that are not obviously committed to selling them, so this removes an overhang,” Townsend said. “And of course, no one really wants the U.S. Treasury as one of its principal partners.”

Pandit had told Congress in February 2009 that taxpayers were right to expect a return on their investment. He pledged to take a $1 salary until Citi returned to profit.

Citigroup may post an $11.7 billion profit this year, according to the average estimate of 16 analysts surveyed by Bloomberg, following two straight years of losses totaling $29 billion.

“In addition to repaying the government and achieving three consecutive profitable quarters, I believe we have put all the elements in place for sustained profitability,” Pandit said in the memo to staff.

Next year, Citigroup’s board “intends to compensate Vikram commensurate with the job of CEO,” the company said in a statement in September. Pandit received $165 million from Citigroup in 2007 as his share of the proceeds from Citigroup’s purchase of his hedge fund, Old Lane LP, which was closed the next year.

Citigroup isn’t likely to see an immediate reprieve from regulatory oversight that followed the bailouts, said Nancy Bush, an independent bank analyst based in Annandale, New Jersey.

“These companies are going to get a level of scrutiny from the government that will continue to be extraordinary,” Bush said. “Treasury and the Federal Reserve and everybody else, they’re not going to go through this again.”

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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