Treasury Profits From Trimming Citi Stake

Updated to include Citigroup comment, fresh share price additional quote.

NEW YORK ( TheStreet) -- The U.S Treasury said Thursday it's reeled in gross proceeds of more than $10 billion so far from its efforts to whittle down its bailout-related stake in Citigroup ( C).

The Treasury said in a statement that to date it's sold roughly 2.6 billion shares of Citigroup common stock at an average price per share of $4.03. It has received total gross proceeds of approximately $10.5 billion from the sales, which are being made in the open market through a pre-arranged trading plan being implemented by Morgan Stanley ( MS). The stake is the result of the conversion of preferred stock issued as part of Citigroup's bailout being converted to common shares that the Treasury owns at a price of $3.25 each.

Based on those numbers, the Treasury would have booked a gross profit of roughly $2.03 billion on the sales, which began in late April. Citigroup's stock ran as low as $3.62 earlier in Thursday's session, but has since bounced into positive territory and was up a nickel to $3.81 in recent trades. Volume of 610 million compared to the issue's three-month trailing daily average of 818 million.

The Treasury sold approximately about 1.1 billion shares of Citigroup common stock in this latest round of selling, its second. That figure is below the authorization of 1.5 billion shares it gave Morgan Stanley late last month, but Treasury had said at the time that the second program would cease on June 30, regardless if all the shares were sold yet, because of the blackout period set by Citigroup ahead of its second-quarter report on July 16.

Treasury received a total of 7.7 billion shares of Citigroup common stock last summer as part of the exchange offers conducted by Citigroup to strengthen its capital base. As part of the plan, the government exchanged $25 billion worth of preferred stock for common stock. The $25 billion in preferred stock was part of the total of $45 billion the government used to prop up Citigroup in late 2008 through the Troubled Asset Relief Program. The company repaid the remaining TARP preferred shares in December.

The government still owns approximately 5.1 billion shares of Citigroup stock and expects to continue selling shares in the market following the blackout expiration, it said.

Citigroup said in a statement emailed to TheStreet that it was pleased that the Treasury "has profitably sold a third of its common shares in Citi, adding to the substantial return for taxpayers realized last year when we repaid the December 2008 TARP investment."

Since April 23 -- the last trading day before the government announced its plans to sell the first tranche of shares -- Citigroup shares have lost roughly 23%.

While the share sales, along with macroeconomic factors and market concerns about the impact of financial reform, have pressured the shares, the stock could see a lift ahead of its second-quarter report because of the pause in the Treasury's exit program. And at least one observer says the government should "seriously consider" a secondary offering on the back of any rally in shares.

"If the supply of about 64 million shares per day from the U.S. Treasury's selling is driving down prices, then we should expect Citigroup shares to rise in the blackout period and fall when the blackout period ends on July 16," says Dr. Linus Wilson, an assistant professor finance at University of Louisiana Lafayette, tells TheStreet. "Yet, there are a lot of things that can move the stock price between now and earnings. Therefore, in practice, it may be hard to determine if the lack of selling boosted prices in the blackout period."

Wilson says the beginnings of a slowdown in summer trading could have affected the Treasury's plans to sell shares.

"The news that the U.S. Treasury has only sold a total of 2.6 billion shares is disappointing," he says in a follow-up email. "This slower pace of sales of about 55.3 million shares per trading day indicates that there is a 54.6% chance that the U.S. Treasury will either have to sell some shares at a loss or get an extension from Citigroup to postpone the December 14, 2010, deadline for the completion of the sale."

Wilson also posits that the U.S. Treasury should "seriously consider" a secondary offering of all or most of its shares if Citigroup's stock rallies in the wake of its second-quarter report.

Analysts on average estimate the bank to earn 6 cents a share on revenue of $22.33 billion for the quarter ending June 30. Citigroup's quarterly results, like other large banks including JPMorgan Chase ( JPM), Bank of America ( BAC) and Goldman Sachs ( GS), will likely be weighed down by weak trading and investment banking revenue during the quarter.

Bank of America Merrill Lynch analyst Guy Moszkowski was the latest to cut earnings estimates on the large banks including Goldman Sachs, JPMorgan, Morgan Stanley and Citigroup in a research note published Thursday.

"Following a healthy first five weeks of the quarter, macro uncertainty (Europe, China, mixed U.S. data, FinReg Reform, investigations) and risk aversion returned to the markets, hurting trading and IB results at the banks," Moszkowski told clients. "With summer months upon us, we would typically not expect a significant pick-up in activity though 3Q09 was strong (and there have been other exceptions). While this could change rapidly, positive catalysts are currently scarce."

--Written by Laurie Kulikowski in New York.

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