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Pass the smelling salts — it looks like the U.S. government will make money off of the Citibank (Stock Quote: C) rescue. A lot of money. Uncle Sam should turn a $7.5 billion profit when it sells its Citi stock this week. Even better, and significantly more surprising, is that taxpayers could make money on the AIG bailout as well.

All told, the U.S. government, on behalf of the U.S. taxpayer, will earn $15.4 billion on the dividends and interest stemming from the $700 billion bank bailouts of 2008 and 2009. The federal government will also make money from bank stock warrants, which gives the U.S. Treasury the right to buy a given bank’s stock down the road, at a specific price.

As for Citi, the bank received $45 billion from Uncle Sam, of which $25 billion was converted to the federal government’s actual ownership stake in the bank (via 7.7 billion shares in the stock purchase). The remaining $20 billion was treated as a loan to Citi, which has repaid all of the money.

So how in the world did we go from bailout to cash out? The federal government took a 27% stake in Citibank back in 2008, at a bargain basement rate of $3.25 per share. Citi was trading at $4.34 early this morning. In contrast, an investor who bet on the S&P 500 over the same period of time would have lost 3%. Still, Citi was far from a sure thing. In fact, Citi’s stock was declining back on 2009, but the U.S. Treasury Dept. opted to ride it out and see if Citi’s stock would rebound in 2010 — which is exactly what happened.

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Another big reason for the bailout profit, as we have well documented here at, is that banks like Citi grabbed billions in bailout money and sat on it — basically lending it selectively to financially solid borrowers and pocketing the interest. That fattened the coffers of big banks and set the stage for Uncle Sam to get his bailout money back.

One more key factor: A good chunk of the overall bailout cash went to AIG (Stock Quote: AIG) — about $180 billion, all told). AIG used the money to pay back debts owed to big banks, which didn’t have to repay the money.

Since Citi’s stock has been on an upward climb since the bailout, that’s made it easier for the federal government to sell shares back into the market, and make billions in the process.

As an investment move, the Citi bailout was a risky one — but one that has paid out big time for U.S  taxpayers.

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