The U.S. Treasury on Monday plans to start selling off its 27 percent stake in Citigroup , the latest step in the Obama administration's effort to end unpopular bailout programs.
The U.S. government owns 27 percent of the bank's shares, a stake it acquired when it gave Citi $45 billion in bailout money in 2008 and 2009. Citi has paid back $20 billion in preferred shares, but another $25 billion was converted to common stock last year.
Citigroup stock was down 3.5 percent in midday trading, the top decliner on the KBW Banks <.BKX> index.
The Treasury announcement disappointed investors who were hoping that the government had already started unloading its Citigroup stake, analysts said.
The market was hoping that somehow sales were actually happening when there were some big volume spikes over the last couple of weeks, said Anton Schutz, president of Mendon Capital Advisors. This announcement makes it look like the government hasn't sold any Citi stock yet.
The Treasury said it gave Morgan Stanley , its sales agent, authority to sell up to 1.5 billion common shares, a first batch of the 7.7 billion shares the government holds.
The Treasury said it expects to give Morgan Stanley the authority to sell more shares after the initial amount.
The Obama administration is winding down the Troubled Asset Relief Program (TARP) as quickly as it can. The $700 billion program is unpopular with American taxpayers who contributed to the rescue and then watched executives collect multimillion-dollar pay packages.
Most big banks have repaid TARP funds, as have General Motors and Chrysler. But repayment of most of the billions of dollars plowed into GM, as was the case with insurer American International Group Inc , will likely have to wait.
If the Citigroup shares are sold around their current price, the Treasury could make a profit of some $12 billion on its Citi common stock holdings because it bought the shares at a conversion price of $3.25 each.
But Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette, said he saw a roughly 20 percent chance that the shares could dip below that break-even price of $3.25 by mid-December.
The quicker the Treasury really gets this sale on, the better the chance that they'll exit with a profit. But they should expect on average there to be seven or eight days that the stock will be below $3.25, he said.
Citigroup said in a regulatory filing on Monday that the sales would be made through ordinary brokers' transactions, in block transactions or as otherwise agreed with the Treasury. The Treasury can also make a separate agreement to sell common stock shares to Morgan Stanley.
The settlement for the share sales will occur on the third business day following the date on which any sales are made, Citigroup said in the filing. It estimated that it will pay about $82 million in total expenses for the offering.
The Morgan Stanley pre-set trading plan does not include the Treasury's holdings of Citigroup Trust Preferred Securities or warrants to purchase Citi common stock.
Under the Treasury's sales agreement with Morgan Stanley, the bank can earn between $23.577 million and about $134 million for selling all 7.7 billion shares. The Treasury will pay Morgan $0.003 for each Citi share sold electronically and $0.0175 for each share sold via other methods.
Citigroup said in the filing that Michael J. Tarpley, associate general counsel for its Capital Markets unit, would act as its legal counsel for the sale. The Treasury's legal counsel will be Simpson Thacher & Bartlett LLP. Morgan Stanley is retaining Cleary Gottlieb Steen & Hamilton LLP as legal counsel and Davis Polk & Wardwell LLP as structuring counsel.
(Reporting by David Lawder and Maria Aspan; Editing by Chizu Nomiyama, Dave Zimmerman and Robert MacMillan)