The good news that the U.S. Treasury had sold 1.5 billion Citigroup (NYSE:C) shares for a $1.3 billion profit was tempered by news that the U.S. Treasury would stop its selling in advance of quarterly earning blackout periods. The U.S. Treasury received 7.7 billion shares when it converted a $25 billion Troubled Asset Relief Program (TARP) preferred share investment into common shares in July 2009. This raises the odds substantially that the Citigroup share sale will not meet its December 14, 2010, deadline.
By my estimates, this means that 22 of the 115 remaining trading days between June 1, 2010, and that deadline will not include U.S. Treasury’s share sales. (If the earnings announcements follow last year’s pattern, then the days when the U.S. Treasury will not be selling will fall between July 1, and July 17, and October 1, and October 15.)
As of the close on June 1, 2010, there are 93 days to unload about 6.0 billion shares. The pace of selling from April 26, 2010, to May 26, 2010, was 65 million shares per trading day. If the U.S. Treasury kept that pace through Tuesday, June 1, 2010, then there are 6.0 billion shares left.
Thus, the U.S. Treasury cannot afford to drop out of the market for a single one of those 93 days if they maintain this pace. At the close on June 1 with a share price of $3.86, the model explained in my paper “Selling Citigroup” puts the odds of one of those days being below the U.S. Treasury’s breakeven price of $3.25 at 53 percent. This is less than my 68 percent estimate when the stock closed at $3.63 on May 20, 2010.
Since the geometric Brownian motion model underestimates the chances of bad events, the odds of the share sale missing its deadline are probably higher. Even if Morgan Stanley (NYSE:MS), which is authorized to sell the taxpayers’ stake according to a preset trading plan, steps up the share sales to 100 million shares per day, there is still a greater than one in four chance that they will have to sell some shares at a loss to meet the December 14, deadline.
Last week was actually a good week for Citigroup with analyst upgrades and interest from sovereign wealth fund investors. While I advocate (and have advocated) that the U.S. Treasury improve the odds of exiting Citigroup quickly with an underwritten secondary offering of the shares, last week’s press release apparently dampens hope of that happening any time soon.
One way to improve the U.S. Treasury’s odds would be to sell a large private placement of the shares to the sovereign wealth fund the Qatar Investment Authority. I think such a sale would be a good deal for taxpayers if the price is right, but it is not clear that the U.S. Treasury’s advisor Morgan Stanley has the trading authority to do such a trade outside of trading hours.
Certainly, sovereign wealth fund investments in Citigroup are nothing new. Steven Davidoff, the “Deal Professor,” has a new book, Gods at War, which among other things looks at the major sovereign wealth fund investments in the last decade. The major Wall Street banks were the largest recipients of those funds, according to Davidoff. The Abu Dhabi Investment Authority and the Government of Singapore Investment Corporation bought stakes of $7.5 billion and $6.8 billion in late 2007 and early 2008, respectively. Both investment groups sustained big losses on these stakes since the Citigroup stock was trading at $30.70 and $26.94 at the respective investment dates.
At current prices, a 1.5 billion stake in Citigroup would be smaller than both those earlier sovereign wealth fund investments. If Morgan Stanley does a big trade with the Qatar Investment Authority, then it could have about 60 percent of its original 7.7 billion share stake sold before July. If the U.S. Treasury does not do a big secondary offering or a big trade, then it is likely that the Treasury will not meet its agreement to liquidate the Citigroup stake by mid-December.
Disclosure: I only have long positions in broad-based index funds. I do not own individual securities in the companies mentioned. I received no compensation for mentioning the book Gods at War, which I found helpful for writing this article.