Citigroup (C) May Try To Buy Back Government Shares

September 15, 2009 by Douglas A. McIntyre

uncle samCitigoup (C) may try to buy back some of the shares that the US government got when it bailed out the bank. Taxpayers own 34% of Citi and it may be time for the Treasury to take some profits.

According to The Wall Street Journal, Citi may have to raise $5 billion as part of a transaction that would allow the government to get a return on its investment, a return that could be as high as $10 billion.

The elephant in the room is whether the Treasury and Federal Reserve have material non-public information about the bank’s balance sheet and prospects. The answer is almost certainly “yes.” Taxpayers might be able to get a good return on their Citi investment, but the federal government might have to violate its own securities laws to make that happen.

Citigroup’s balance sheet has long been considered impenetrable by analysts. It does not disclose enough about the bank’s troubled assets, particularly toxic paper and loans that are likely to default. for experts to know how much trouble the firm may be in. The government has had a chance to review all of those details both during its stress tests of large financial firms and its review of Citi’s balance sheet status as it put money into the bank to keep it from failing.

Heavy regulation of banks and the huge bailout of the system have put the Treasury and Fed in a difficult position. They should be the last shareholders in Citi to sell stock because they know so much. Taxpayers may benefit the most if they are early sellers. But, every other shareholder in the bank may be left holding equity in a firm that the government knows is in trouble.

Douglas A. McIntyre