How Badly has Treasury Mismanaged the Citi Bailout?

[Mari333]

Treasury made a serious mistake in December 2009 when it allowed Citigroup to raise $20 billion in equity to pay off a $20 billion loan that taxpayers had extended the company in 2008. It was good to see the loan repaid, but it was not good to see it repaid with this giant stock offering. The government had two different investments in Citi under the bailout—the $20 billion loan, and a 33% stock stake that it had purchased for $25 billion. By issuing the new stock, Citi was raising money for itself, but reducing the value of the stake that taxpayers owned in the company (”diluting” the stake, in finance jargon).

And taxpayers were, in fact, severely diluted. Citi sold new shares at $3.15 each—well below the $3.95 price that the company’s shares were trading at before they announced the offering. The 7.7 billion Citi shares that taxpayers owned dropped from 33% of the company’s value to 26%. That’s a 21% loss in the value of the stake, and it resulted in a permanent reduction in the return that taxpayers can ever earn on our bailout investment. It was clearly terrible for taxpayers. As Oppenheimer & Co. analyst Chris Kotowski put it in a Dec. 16 note to clients: “Their shareholders, most promininently including the American taxpayer, have been needlessly diluted.”

Treasury squandered billions of taxpayer dollars by allowing this insanity to proceed. In less than a week, we lost about $6 billion. If Treasury had sold its stake right after the offering, it would have booked a loss on our Citi shares. It appears that Treasury wasn’t really trying to manage the taxpayers’ investment effectively—it was more concerned about releasing cranky bankers from executive compensation restrictions, and declaring TARP a success as quickly as possible.










http://blogs.alternet.org/speakeasy/2010/04/07/how-badly-has-treasury-mismanaged-the-citi-bailout/