Treasury Unlikely to Complete Citigroup Share Sale on Time

Includes: C, KBE, MS, SPY, XLF
by: Linus Wilson

The U.S. Treasury commenced its Citigroup (NYSE:C) share sales again on Friday, July 23, 2010. Yet, it looks increasingly unlikely that the government can make its deadline to sell the whole stake. Further, the chances are very good they will not be able to liquidate their stake by the end of 2010. The current pace of 55 million shares per day is too slow for the 5.1 billion shares to be sold by the promised completion date of December 14, 2010. Further, even a quicker pace of sales leaves a good chance that the U.S. Treasury will be holding shares at the end of the year.

There is greater than a one-in-five chance that the U.S. Treasury will still be a Citigroup common shareholder even if it steps up its share sales to 70 million shares per day. I’m glad they are selling the shares, but Tim Geithner and Company could have taken steps to speed up the process. Friday’s announcement by the U.S. Treasury that its agent Morgan Stanley will sell 1.5 billion shares between now and September 30, 2010, makes the chances of a quick exit seem remote. My research indicates that the current pace of share sales is having no measurable impact on the Citigroup share price.

The odds of a delayed exit are rising because the Citigroup share price is lower than when the sales started and the longer than expected blackout periods. The closing price just prior to the announcement of the share sale was $4.86, but on Friday after some overall market turmoil and a good second quarter earnings announcement the share price was at $4.02. I believe the U.S. Treasury will balk at selling the shares for a loss. That means that, if the stock dips below $3.25, the taxpayers’ breakeven price, the U.S. Treasury will likely have its broker Morgan Stanley (NYSE:MS) suspend sales. In addition, the last earnings blackout period from July 1, to July 22, the U.S. Treasury paused for 16 trading days. I expect a similar pause in October. The length of the earnings blackout periods is higher than I expected in “Selling Citigroup” and my earlier estimates.

This slow pace of sales is not surprising. The U.S. Treasury is eager to continue acting like a sovereign wealth fund. Yet, unlike other sovereign wealth funds created by governments that are running huge surpluses, the Geithner fund borrows taxpayer money to make bad bets on the banking sector. Even on the U.S. Treasury’s most profitable investments the U.S. Treasury’s alpha, risk adjusted return, is very negative. The Treasury will soon obtain Congressional approval to make new equity investments in the banking sector. Thus, Citigroup’s shareholders and mangers will likely have to wait longer for the privatization to be completed.

Disclosure: I do not have long or short positions in individual securities in the companies mentioned. I have long investments in broad-based index funds that attempt to replicate the U.S. stock market.