U.S. Taxpayers Make $12.3 Billion Profit on Citigroup Bailout

By: Money_Morning

Don Miller writes: The U.S. Treasury on Monday will complete the sale of warrants of Citigroup Inc. (NYSE: C), allowing it to realize a $12.3 billion profit from its bailout of the banking giant.

The United States will record a net $312.2 million from the sale of its final 465.1 million warrants to purchase common shares of Citigroup, the Treasury Department said Wednesday. Last year, Treasury sold its 34% stake in Citigroup common shares.

The warrant sale is the latest step in disposing of the bank's assets after the government lent the company $45 billion in Troubled Asset Relief Program (TARP) funds during the height of the financial crisis in 2008.

"Our investment in Citigroup has produced a significant profit for taxpayers," Tim Massad, Treasury's acting assistant secretary for the bailout program, said in a statement. "As we exit our investments ... it's clear that the cost of the TARP program will be a fraction of what many had once feared during the depths of the crisis."

Overall, the Treasury doled out a total of $410 billion from the TARP fund. With the successful completion of the Citigroup warrant auction, the Treasury has received back a total of $271 billion in repayments and income on its investments, the department said.

However, even with the profitable return on the TARP investment in Citi, the continued existence of financial institutions that are "too big to fail" is a recipe for disaster, a key government overseer group said Tuesday in a critical report.

The big credit rating agencies, including Standard & Poors and Moody's Corp. (NYSE: MCO), are giving big banks better credit rankings because of their view that the government will once again ride to the rescue if another crisis were to surface, the report said. Moreover, creditors are giving the banks access to funds at a price that discounts the risks created by their behavior.

"As long as the relevant actors [executives, ratings agencies, creditors and counterparties] believe there will be a bailout, the problems of ‘too big to fail' will almost certainly persist," said the report, which was authored by TARP's Special Inspector General Neil Barofsky.

The report contends that while the Treasury Department's actions calmed the troubled markets at the time, the government bailout also encourages future high-risk behavior by big banks.

Institutions such as Citigroupoperate in a "gross distortion" of a normally functioning market because they have an implicit government guarantee that they will not be allowed to fail.

"These [too-big-to-fail] institutions and their leaders are incentivized to engage in precisely the sort of behavior that could trigger the next financial crisis, perpetuating a doomsday cycle of booms, busts and bailouts," the Office of the Special Inspector General for TARP, known as SIGTARP, said in a quarterly report to Congress.

Of course, the U.S. Treasury's Massad disagrees.

He argued that the Dodd-Frank Act gives financial regulators the ammunition they need to shut down large, systemically risky institutions without causing collateral damage to the markets. He also insisted that TARP was a critical component in the fight to avert a much deeper financial crisis.

Dodd-Frank "gives us the ability to address those systemic risks and to shut down or wind down those institutions," Massad said. "This [TARP] was a very successful program that helped prevent a depression, and now will have a very low cost."

The Treasury still has remaining interest in Citigroup in the form of Trust Preferred Securities with a principal value of $800 million. Those securities are being held by the Federal Deposit Insurance Corp. (FDIC) under the Temporary Liquidity Guarantee Program against potential losses on Citigroup debt that is being guaranteed by the FDIC.

If the debt is paid in full, the FDIC will turn over the $800 million in Citigroup securities to the Treasury, further bolstering the government's return on its investment.

Banks accepting TARP money were required to provide the Treasury with warrants to maximize returns on the taxpayer funds. The Treasury has been auctioning its warrants over the past several months as banks have repaid their government loans.

One group of the Citigroup warrants was sold for $1.01 per warrant and a second group of warrants brought 26 cents per warrant. The Treasury Department had set a minimum bid of 60 cents for the first group and 15 cents for the second group, the Associated Press reported.

Purchasers of the warrants will have the right to buy an equal amount of shares of Citigroup at a fixed price.

The government sold 255 million warrants designated as Group A that sold for $1.01, giving buyers the right to buy shares at the a fixed purchase price of $10.61. Roughly 210 million warrants designated as Group B warrants sold for 26 cents per warrant, with the fixed purchase price set at $17.85.

The warrants were sold through a Dutch auction method, which sets a market price by allowing investors to submit bids above a minimum price specified for each auction. Deutsche Bank Securities was in charge of the sale.

Source : http://moneymorning.com/2011/01/27/...

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