Treasury won't sell Citi stake

Specialist Patrick Murphy (left) and trader Christopher Fuchs, with Citigroup Global Markets, confer on the floor of the New York Stock Exchange on Thursday before the Citigroup secondary offering opens. The Treasury Department on Thursday backed out of p

WASHINGTON -- In a striking reversal of its attempts to unwind the government's financial stakes in big banks, the Treasury Department has backed out of plans to sell a portion of its 34 percent stake in Citigroup Inc.

The move came after investors responded tepidly to a massive stock offer by the New York-based bank. Citi said Wednesday it will sell 5.4 billion common shares at a steep discount to raise the cash it needs to repay $20 billion of the $45 billion in government support it received to weather the financial crisis.

In what it called the largest equity offering in history, the price of $3.15 per share was 9 percent below where the stock was trading before the announcement. The bank also is selling 35 million tangible equity units, which can be converted into common stock at a later date, for $100 each.

Citigroup's surprisingly low pricing for its common shares provides a clear sign that investors are still nervous about the banking giant's ability to regain its financial health.

"The market is not buying the Citi story right now," said Alois Pirker, a research director at financial consultancy Aite Group.

Citi is the last remaining Wall Street bank in which the government still owns a major stake. Treasury's move underscores the Obama administration's halting progress in drawing back the tens of billions of dollars it invested to stabilize the banking sector.

The government converted $25 billion of its Citi bailout into a 34 percent equity ownership stake in the bank earlier this year. The government paid $3.25 a share, which means it would have lost a dime a share in the offering.

The government was planning to sell 20 percent of its stake at the same time Citi was selling new shares. At a price of $3.15, the government would have lost $158.7 million on the sale. It balked at the deal.

"Based on today's offering price, Treasury has decided not to participate in the equity offering," said a department official familiar with the matter who spoke on condition of anonymity because she wasn't authorized to discuss it.

Citigroup shares tumbled 25 cents, or 7 percent, to $3.20 Thursday, after falling as low as $3.13 earlier in the day.

The government still plans to unload all of its 7.7 billion shares during the next year.

Analysts say Citi, which managed the underwriting of the offer itself, didn't have much of a choice but to take the hit of selling at a low price because of uncertainty surrounding the bank.

It said once the offerings are complete and it repays the $20 billion, it will no longer be deemed a recipient of "exceptional financial assistance" under the government's Troubled Asset Relief Program, and therefore won't be subject to some of the strict executive compensation rules attached to the bailout funds.

The repayment may boost Citigroup's image. It also will save the bank $1.7 billion a year in dividend payments.

Citi still must demonstrate it can maintain profitability for an extended period of time.

Citigroup has been among the hardest hit banks by the credit crisis. It earned $101 million during the third quarter before accounting for preferred stock dividends and the debt exchange that gave the government a stake in the bank. Including those items, Citi lost $3.24 billion.

The bank has to deal with loan losses that continue to pile up. It set aside $8 billion during the third quarter to cover loan losses.

Citi must also find buyers for some of the risky investments that got it into this predicament in the first place -- Citi separated its risky assets into a separate division earlier in the year.

On top of that, Citi now has to fight fraud claims by a key investor. Abu Dhabi's main sovereign wealth fund is looking for compensation or to exit a $7.5 billion investment in Citigroup, saying the bank misrepresented its health when striking the deal in late 2007.

With all those questions remaining, trying to sell shares at a higher price could have led to a bigger disaster: not enough investors willing to buy into the $17 billion common stock offering -- the largest equity offering in history.

Citi had to get the deal done or else it would be left further behind competitors, analysts say.

Already struggling to keep top talent and draw in new customers, Citi would have been the only big bank stuck under restrictions tied to receiving government bailout money, including caps on employee compensation.

The last remaining national banks that had yet to pay back bailout money, Bank of America Corp. and Wells Fargo & Co., both recently took steps to do just t hat.