Less than two years after it began, the U.S. government's life-saving embrace of the country's financial industry is nearly finished.
Most of the largest banks have already repaid American taxpayers, and now Citigroup Inc., C-N long considered the most vulnerable of the surviving big banks, will join them.
With Citigroup's share price on the rise, the Treasury Department said Monday that it will sell its 27-per-cent stake in the bank over the course of this year.
The government received the right to buy the shares in exchange for a $25-billion (U.S.) cash infusion made in late 2008 as the financial system tottered. It has proven to be a very good investment. At last week's closing price of $4.31, the shares were worth about $33-billion, or roughly 30 per cent more than what the government paid for them.
Provided that Citigroup's shares stay buoyant, the sale of the government's stake could be the biggest windfall yet as bailout funds are repaid. The fact that Citi has gone from albatross to money-maker in a relatively short period underlines the success of the government's efforts to revive the banking system.
Big U.S. banks have turned out to be good borrowers. Nine of the country's largest banks have repaid more than $150-billion in public money, or about two-thirds of what the government gave to all banks under the Troubled Asset Relief Program (TARP), according to analysis by Pro Publica, a public-interest journalism initiative.
There's still a long way to go, however. To date the Treasury Department has recouped $203-billion from a total outflow of $514-billion, according to Pro Publica. That includes bailout money not only for banks, but also for the auto and housing sectors, as well as insurer American International Group.
Resuscitating the largest banks, as painful as it has been, may turn out to be the easy part. Many smaller banks, which also received taxpayer money, continue to struggle.
In February, 80 financial institutions, many of them small banks, failed to pay dividends to the government, breaching one of their obligations as recipients of federal cash. That tally was up from 55 institutions three months earlier.
What's more, for two of the biggest recipients of government assistance – mortgage-financing giants Fannie Mae and Freddie Mac – there is no clear exit in sight. They have received $126-billion in bailout money, but are eligible for an unlimited amount of funding should it be required.
“The biggest question has to be Fannie and Freddie,” says Fred Cannon, chief stock strategist at investment firm Keefe, Bruyette & Woods. “That is the one area where money is still flowing out.”
The special inspector general charged with monitoring TARP struck a sobering note in a quarterly report to Congress at the end of January.
On the positive side, large banks have been able to tap capital markets for funds, and therefore have repaid government money “years earlier than most would have predicted.”
On the other hand, the report noted, the whole rationale behind the bailouts was that banks would start lending again to businesses and consumers, something that has not happened. Once the funds are repaid, the government's ability to influence banks to carry out such goals is lost, it said.
Citigroup received one of the largest packages of aid from the government, absorbing $25-billion in October, 2008, and an additional $20-billion at the end of that year. It repaid $20-billion in December, 2009.
Monday's announcement that the government will sell its Citi shares pushed down the bank's stock price. It closed at $4.18, down 3 per cent, but well above the $3.25 price at which the government bought its 7.7 billion shares. The Treasury Department said it will sell its stake in an “orderly and measured” fashion according to a prearranged plan, which will help minimize turbulence in the stock's trading.
Analysts said they viewed the announcement as a positive development that might even lure large institutional investors back into buying the stock.
So long as the government owns a hefty piece of the bank, investors will worry about the management's ability to make its own decisions, noted Jeff Harte, a banking analyst at Sandler O'Neill & Partners. Any action to bring down the government's stake “should help to reduce these concerns,” he wrote.
