Citi Surges on Report of Paulson Investment

Updates stock price

NEW YORK (TheStreet.com) -- Citigroup (C Quote) shares surged Thursday as much as 10% on furious trading after famed hedge fund manager John Paulson, who made a name for himself after betting on the housing meltdown, was said to be acquiring stock in the battered financial institution.

Hedge fund firm Paulson & Co. reportedly has bought up to a 2% stake in Citi in recent weeks, according to The New York Post, citing unnamed sources.

Sources apparently say that Paulson is buying shares of Citi on the belief that the company's assets are undervalued, according to the article. Paulson sees shares of Citi trading closer to its book value of $5 to $7 a share, the article adds.

A spokesman for Paulson declined to comment to The Post on the hedge-fund manager's investment activities.

Citi shares were most recently rising 8.4% to $5.02. While the stock touched the critical $5 mark earlier this week, Citi shares have not closed above $5 a share since mid-January.

Citi shares have been rising since the completion of the exchange of $58 billion worth of preferred shares to common stock at the end of July. The exchange gave the U.S. government a 34% stake in the firm. Still, Paulson's bet is gutsy considering that the Treasury Department is unlikely to cede control of that stake anytime soon.

The company is still plagued by toxic assets, now held in its so-called "bad bank" unit, Citi Holdings. But in Citicorp, its so-called "good bank," Citi is also struggling from mortgage and credit card losses in its consumer loan portfolio.

Paulson has also bought shares in other financial institutions, including Bank of America (BAC Quote), Goldman Sachs (GS Quote) and Regions Financial (RF Quote).

Written by Laurie Kulikowski in New York