Treasury to delay selling government's stake in Citigroup after share price falls
Thursday, December 17, 2009
Citigroup wants to escape government control. The Obama administration wants to cut it loose. But investors are still standing in the way.
The New York bank said Wednesday that it was on the verge of raising $17 billion from investors toward repaying its federal aid, but only at a price of $3.15 per share, 20 percent lower than the price of its shares at the beginning of the week.
That discount was much larger than expected, leading the Treasury Department to postpone its plans to start selling the government's 34 percent stake in Citigroup. Treasury had expected to reap a substantial profit on the shares, which it acquired at $3.25, but selling now would instead result in a loss of hundreds of millions of dollars.
Treasury still plans to sell its stake over the next year, according to people familiar with the matter. Until then, the government will remain a major shareholder.
Citigroup issued a statement underscoring its success in raising the massive amount of money, and noted that it was now poised to repay federal aid and thereby escape extraordinary government restrictions including limits on compensation.
Financial analysts say that investors are concerned about the company's health and are angry that Citigroup is diluting the value of existing shares as it raises money to repay the government. Based on Wednesday's lower price, Citigroup will have to issue even more shares to raise the money that it needs.
Analysts said that some foreign investors, in particular, believe that Citigroup still is safer in the government's arms.
The Abu Dhabi Investment Authority pressed Citigroup Wednesday to return $7.5 billion it invested in the bank in 2007. The fund filed an arbitration claim against Citigroup, seeking $4 billion in damages if the money is not returned on the grounds that Citigroup secured the deal through "fraudulent misrepresentations."
Under the terms of the original investment, the money from the sovereign wealth fund will be converted into shares of Citigroup common stock beginning next year at prices in excess of $30. With Citigroup shares trading just above $3, Abu Dhabi faces the prospect of an immediate plunge in the value of its investment.
Citigroup said in a statement that it would fight for the terms to be enforced.
"Citi believes the allegations are entirely without merit and intends to defend against them vigorously," the bank said.
The Abu Dhabi claim follows the announcement earlier this month that the Kuwait Investment Authority had sold its $4.1 billion stake in Citigroup.
The U.S. government's push to sell its stake in Citigroup includes an Internal Revenue Service ruling that allows the company to retain billions in tax breaks that otherwise would lose value under existing law. Financial experts said that the change in tax law, made on Friday, amounted to a discrete government subsidy for Citigroup, and that the foregone tax revenues could exceed the profits from selling the government's stake in the company.
Treasury defended the decision Wednesday, saying that the law was written by Congress to discourage corporate raiders, and that Treasury had the power to decide that the law did not apply to the government's actions based upon its understanding of the original purpose.
"The real story here is simple and straightforward," Herbert M. Allison Jr., the assistant Treasury secretary for financial stability, said in a statement. "The government decided not to apply a law meant for private companies to itself, because the policies underlying that law are not implicated here."