Does Treasury Stand to Lose on Citibank Shares if It Delays Selling?

Includes: C, GS
by: Linus Wilson

By my calculations, Treasury only had nine trading days of wiggle room if it sold 50 million shares per trading day. Fifty million shares could be 1/3 of volume sold on a slow day. If it refuses to sell its shares for below the government's $3.25 purchase price, the simulations in my paper "Selling Citigroup" show that there is a 17 percent chance that the government will not complete its sale of 7.7 billion shares by December 14, 2010, its deadline. (Those odds have almost surely risen since the share price has slumped from its $4.86 close on my valuation date of April 23, 2010.)

I expect the Treasury to make slightly more money on average from a slow sale than from a quick sale. Nevertheless, the downsides are much lower if the US Treasury exits its Citigroup (NYSE:C) stake at least in part by a large underwritten offering. As the diagram below shows, the US Treasury stands a greater chance of selling some shares at a loss if they delay selling their stake.

Today's Citigroup's short term debt is less costly than Goldman Sachs' (NYSE:GS). That seems like a good time for taxpayers to sell their 7.7 billion shares in Citigroup. The US Treasury announced on April 26, 2010, that they would unload taxpayers' 27 percent stake in Citigroup (C) in a slow at-the-market sale. Yet, they only have until December 14, 2010, to complete the massive sale. That announcement clarified for investors that Geithner and Co. are still waiting until the last minute to do their homework.

(Click to enlarge)

There are couple of reasons why the US Treasury should consider a large $10 billion to $20 billion underwritten secondary offering to make sure they don't break their promise to sell the shares in 12 months:

1. It is dangerous for the US Treasury to break its agreement. Investors like to think that the US Treasury keeps its promises. Breaking this very public agreement with Citigroup's managers and shareholders would make the Treasury seem less reliable. A delayed sale may also cause Citigroup's share price to fall, as the prospects for a government exit dim.

2. Holding the stake for a long period means that the US Treasury is speculating with taxpayer dollars. The US Treasury is in a poor position to speculate because its assets are poorly diversified. When you are not diversified, you are not rewarded for all the risks that you take on. Most of the risks in the large Citigroup stake could easily be diversified away by private investors. For the same reason that workers should not put their pensions in the company stock, the US taxpayers should not be holding a large stake in Citigroup stock.

Tim Geithner has had a lucky run of luck speculating in bank stocks on the taxpayers' dime. If he were smart, he would realize that the US Treasury's backers don't stomach losses as well as private investors, and he would take profits more quickly.

Disclosure: No positions