Feds staying the course with Citi

October 19, 2010, 7:06 PM UTC

The government is bullish on Citigroup.

Treasury said Tuesday it plans to sell 1.5 billion Citi  shares over the course of the fourth quarter. The government’s broker, Morgan Stanley, will sell the stock – which was acquired as part of the massive bailout of Citi in 2008 and 2009 — under certain undisclosed conditions, Treasury said.

Treasury's treasure trove

The prearranged sale plan is the fourth of its kind since Treasury announced last December it would sell off its shareholdings in Citi. At the time, the government owned 27% of the New York-based bank, and it was unclear what sort of effect the steady selling might have on Citi’s stock price.

But since that announcement, the government has managed to trim its stake in Citi by more than half, and Citi’s shares have actually risen as the outlook for the bank’s consumer lending business has improved a bit. Monday’s third-quarter earnings report only solidified the view that the bank is recovering.

Tuesday’s sale plan, if carried out in full by year-end as expected, will reduce Treasury’s stake to 2.1 billion shares, or 7% of the outstanding Citi stock. The government would then need another two quarters or so to fully unload its stake, which was acquired at the equivalent of $3.25 a share.

There is an obvious impulse to call for the feds to get out of Citi sooner rather than later, by selling much of the remaining stake at once in an underwritten public offering.

Doing so would allow the government to lock in a profit on its holdings without worrying about the vagaries of the oft-discussed stock market crash, and could put an end to the endless headlines about Treasury “stumbling” by not dumping Citi fast enough. Treasury has indicated it expects to post a profit on its $45 billion Citi bailout.

Treasury initially intended to sell off the Citi stock within a year but has been running well behind that aggressive schedule. But Tuesday’s announcement shows it isn’t unduly concerned about making up for that lost time.