The same day that the revised regulatory reform bill passed the U.S. House of Representatives with provisions to end new Troubled Asset Relief Program (TARP) investments early, the U.S. Treasury has quietly concluded its second Citigroup (NYSE:C) stock selling spree. The U.S. Treasury has an agreement with Citigroup to not sell shares beginning on July 1, 2010, in advance of Citigroup’s July 16, 2010, earnings announcement.
The U.S. Treasury has been selling its Citigroup common stock stake in 1.5 billion share chunks. It sold the first batch between April 26, 2010, and May 26, 2010, for an average price of $4.13 per share or about $6.2 billion. It was scheduled to sell its second 1.5 billion piece by the close of trading on June 30, 2010. By my estimates, this means that the U.S. Treasury has been selling about 64 million Citigroup shares per day over the last two months. That means that since late May the U.S. Treasury has accounted for on average 10 percent of the daily volume in the stock. If they sold the shares at the average of the high and the low over the past 25 trading days, they should have sold the most recent 1.5 billion shares for $3.90 per share or about $5.86 billion. All told the U.S. Treasury should have cashed out on over $12 billion of the $25 billion investment. By my estimates, the U.S. Treasury should still have 4.7 billion shares lying around.
There are only 95 trading days, excluding the trading days in the third quarter earnings blackout period, between the next earnings announcement on July 16, 2010, and the one-year anniversary of Citigroup’s agreement with the U.S. Treasury on December 14, 2010. In that agreement, the U.S. Treasury promised to sell its entire common stock stake of 7.7 billion shares in a year’s time.
If the U.S. Treasury maintains a pace of selling 64 million shares per day and refuses to sell the shares below its “break even” conversion price of $3.25 per share, then there is a 36 percent chance that it will not complete the sale by its deadline. My estimates are based on Monte Carlo simulations of the stock price, taking into account factors such as the implied volatility of options, the current share price, and the cost of equity capital. This methodology is outlined in my paper “Selling Citigroup”, but I have updated the numbers for current market prices.
The success of the U.S. Treasury’s “dribble out” sale of Citigroup stock depends on the July 16, 2010, earnings number. A negative earnings surprise could derail the privatization of the U.S. Treasury’s remaining stake in Citigroup. Yet, a strong earnings number could greatly improve the U.S. Treasury’s chances of exiting the holding on time with a healthy profit. Citigroup is the last of the original TARP recipients which has any securities held by U.S. taxpayers. (The original TARP recipients were State Street (NYSE:STT), Bank of New York Mellon (NYSE:BK), JP Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS).)
It is unfortunate for taxpayers that the U.S. Treasury did not start out its sale with a large secondary equity offering. On the eve of the announced trading strategy, April 23, 2010, Citigroup’s stock price closed at $4.86. Further, it is unfortunate that the U.S. Treasury did not sell a large stake to the Qatar Investment Authority when there was interest in such a sale. There is ample precedent for sovereign wealth funds, holding stakes of 5 to 10 percent of the shares in the big banks, including Citigroup. The share price was $4.86 when the dribble out sale was announced. On June 30, 2010, Citigroup’s share price closed at $3.76 or a $1.10 lower. I hope Citigroup’s second quarter earnings number is a good one. So does Tim Geithner.
Disclosure: I only own broad based index funds and do not own individual securities in the companies mentioned.