Citigroup Inc (C)

[JustCallMeSassy]

US government sitting on $11 billion profit from Citigroup stake
Posted Aug 24th 2009 8:20AM by Zac Bissonnette
Filed under: Citigroup Inc. (C)

The Financial Times reports that the U.S. government "is sitting on a paper profit of almost $11bn on its 34 percent shareholding in Citigroup (NYSE: C), its only direct stake in a large financial institution."

How'd that happen? The Treasury Department converted $25 billion worth of preferred stock into common equity at the end of July. Over the past four weeks, shares of Citi are up a mind-blowing 70%.

According to The Wall Street Journal, it was that conversion that led to the run-up: "Ironically, it is the exchange that made Citi a buy. In short, it solved the bank's chief weakness, a dearth of tangible common equity. Banks lacking TCE are risky stock investments because shareholders stand to be diluted by the capital raises needed to boost equity."

There are a few things to keep in mind about the "gain" on the government's stake in Citigroup. The first is that with a 34% stake, it's impossible to cash out without tanking the share price. The second point is that the "gain" is driven by a government-guaranteed loan program that leaves taxpayers on the hook if things go awry. Indeed, there's an argument to be made that our current fiscal policy is propping up Citigroup and similarly situated companies at a tremendous long-term cost to the economy. So calculating the paper profit on the Citigroup stake is too simplistic because the government's relationship with Citi is too complex.

Still, an $11 billion gain is nothing to sneeze at!