Citigroup Inc's  Vikram Pandit endured a brutal capital raising episode this week in an effort to win the bank's freedom from close government oversight, but the bank's CEO may have won less than he hoped.

In a blow to both the No. 3 U.S. bank and the Treasury, Citigroup sold $17 billion of shares at $3.15 apiece, below the $3.25 price at which the government bought its Citi stake.

The share sale, part of a $20 billion capital raise to help repay funds from the Troubled Asset Relief Program, was meant to reduce the government's say over compensation and other matters at the bank.

But the sale went poorly enough that a key element of Citigroup's plan to extract itself from the government's clutches did not happen: the U.S. government did not sell the up to $5 billion of shares it hoped to shed at the same time as the bank's offering. The government holds 7.7 billion Citigroup shares, now equal to about a quarter of the company.

The government does not want to sell at a loss, a point that Herbert Allison, Treasury assistant secretary for financial stability, emphasized in Congressional testimony on Thursday.

But selling at a profit in the near term could be difficult. If Citigroup's shares rise above $3.25, the government is likely to think about selling off part of its stake in the bank and that pressure could push the shares back below $3.25, analysts said.

If you have a big seller at $3.25, the chances of your getting there are much smaller, said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania.

There are at least two possible scenarios that could lift Citigroup's shares well above $3.25 apiece: a broad rally in the stock market, or the bank posting out-sized profits over the next few quarters.

Analysts are not expecting the second scenario -- the mean estimate for Citigroup's fourth quarter, for example, is a loss of 7 cents a share, and for the first quarter, it is a loss of a penny a share.

The direction of the broader market is more difficult to forecast, but a surge in the stock market in the coming months is hardly a sure thing.

In short, there is a chance the government will have little opportunity to sell Citigroup shares at a profit for some time. The bank said on Monday the U.S. Treasury plans to sell its shares in six to 12 months, but some investors fear that period could be closer to 12 months than six months.

This may translate into the government holding onto its stake for some time, Stewart's Polley said.

STRINGS ATTACHED

With the government holding a large stake in Citigroup, it has a material say in how the bank runs itself, a person close to Citigroup said, which reduces some of the value of the bank's efforts to exit TARP by the end of the year.

One key area where Citigroup was looking to shed government influence is executive compensation. The Obama administration's pay czar, Kenneth Feinberg, has a say over compensation for the top 100 employees at Citigroup for 2009.

When Citigroup repays $20 billion to the government and ends the guarantee it gets from the United States on a pool of assets, it will be able to avoid that oversight, a step expected in 2010.

But if the government holds onto Citi shares for longer, that could translate into pay restrictions at the bank for longer, albeit in a less overt form, said Dan Alpert, managing director at investment bank Westwood Capital in New York.
As long as the government is a major shareholder, Citi can't go crazy on pay, Alpert said.

This oversight does not necessarily mean Pandit is on his way out, analysts said, even if Federal Deposit Insurance Corp Chairman Sheila Bair has in the past pushed for Pandit to leave.

The bank's board of directors seems to support Pandit and, if the bank is not generating big losses, regulators are unlikely to press for his ouster, analysts said.

It is unclear who could step in to do a better job and, although Pandit's tenure has not been free of miscalculations -- including, some investors believe, the rush to repay bailout funds -- many of the bank's problems predate Pandit's arrival.

But longer term, if the bank is unable to generate real profitability, Pandit's future is more uncertain, analysts said.

There's a lot of pressure on Pandit now to deliver, said one analyst at a hedge fund.

(Reporting by Dan Wilchins; editing by Andre Grenon)