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The Treasury Department press release announcing the government's exit of its Citigroup (NYSE:C) shares makes much of the fact that the government made a $12 billion "profit" on the investment. From the release:

Treasury invested a total of $45 billion in Citigroup pursuant to the TARP (and made a $5 billion commitment under the Asset Guarantee Program that was never funded). With this offering, Treasury has recovered all of the $45 billion plus approximately $12.0 billion in profits consisting of, dividends, interest and gain on the sale of Citigroup common stock and other securities.

It's interesting to think about where that $12 billion in profits came from. Did it come from other, non-government Citigroup shareholders, who were diluted by the Treasury investment, which they did not have a chance to vote on? If Treasury had not come along, those dividends might have belonged to them. Or did it come from other, non-government-owned banks that compete with Citi for business and that would have taken greater market share had the government not swooped in to prop up Citi? Or did it come from Citigroup customers, such as the Radio Shack (NYSE:RSH), Staples (NASDAQ:SPLS), and Home Depot (NYSE:HD) store credit-card holders (Citibank-issued cards) stuck paying 28.99% or 25.99% annual rates, or the checking account holders now subject to a $240-a-year fee for account balances averaging below $6,000.

The $12 billion profit sounds pretty good. But a $12 billion profit on a $45 billion investment amounts to a return of 26.67%. Treasury put $25 billion in on October 28, 2008, and another $20 billion in on December 31, 2008. Over these same periods, an investment in the S&P 500 stock index would have returned 30.12% or 35.49%, respectively, by my calculation. So Treasury's Citigroup investment underperformed the stock market as a whole.

Still, a 26.67% return is not bad. Maybe in the next banking crisis, the government will stay on the sidelines and allow some private capital to rise to the rescue. That's yet another way of looking at the question of where the $12 billion in profits came from. They came out of the pocket of some other investor who might have made this investment had the federal government not done so. Realistically, there weren't many people running around in October or December of 2008 with $45 billion to risk on bank investments, but that's in part because government policy toward banks and toward the rest of the economy for that matter was so uncertain that they risked having their investment lost through a nationalization the way the Fannie Mae (OTCQB:FNMA) shareholders had their company seized.

Remember, too, that these investments were all made not during the Obama administration but in the Bush administration, albeit under the guidance of some people, such as Timothy Geithner and Ben Bernanke, who are still involved in making policy. Finally, to the degree that Citi had the earnings power to pay the government back, it raises the question of whether it needed to take the government money to begin with.

These were all decisions made rapidly and in the middle of a "crisis," and the Treasury department is eager to portray them as a success. But the accounting on this is more complicated than just saying, the government made $12 billion in profits, hooray! To really assess it, one has to imagine what had happened if the government had not acted, and to think about where this $12 billion came from. It wasn't just manufactured from thin air. It came from the private sector, and now it belongs to the government. When businesses make profits, they usually do so as the result of revenues produced from voluntary exchanges with customers. When the government makes a "profit," it can come as a result of using the government's compulsory powers.

Disclosure: No position

Source: Treasury's Citi Profits: A Closer Look