Citigroup: Removing Last Blemish of Government Bailout

Citigroup

Citigroup’s (NYSE:C) bailout has finally run its course nearly five years after the federal government agreed to rescue the troubled bank. The United States government is selling the last of the stake it received in return for the bailout funds in November of 2008. The bailout agreement between the two institutions marked a new phase in the government’s efforts to stabilize the banking industry.

After injecting close to $300 billion of capital into financial institutions, officials decided to shoulder bad assets as well. By the time Citigroup inked a deal with the federal government, Lehman Brothers had already filed for bankruptcy, Merrill Lynch had been sold to Bank of America (NYSE:BAC) after a staggering fourth quarter loss, heavy exposure to troubled mortgages had led Citigroup to post four quarters of consecutive losses, and the bank had already received $25 billion in taxpayer funded federal Troubled Asset Relief Program funds. That $25 billion Citigroup received as part of a broader banking-industry bailout was not enough to prevent the bank from becoming insolvent.

On November 23, 2008, a joint statement by the Department of the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation announced that the government would back approximately $306 billion in loans and securities and directly invest about $20 billion in the company. Under the asset guarantees, Citigroup absorbed the first $29 billion in pretax losses on the $306 billion asset pool, after which the government said it would cover 90 percent of the losses with the bank covering the rest. Citigroup received more financial assistance than any other U.S. bank during the crisis.

In return for the funds and the guarantees, the federal government received $27 billion of preferred shares that would pay an 8 percent dividend and warrants equivalent to a 4.5 percent stake in Citigroup. The warrants gave the government the right to buy 254 million Citigroup shares at $10.61. During the week prior to the agreement, shares of Citigroup had closed at a 15-year-low of $3.77.

For the foreseeable future, Citi has oxygen,” Royal Bank of Scotland analyst Tom Jenkins wrote in a report after the agreement was inked. “Today’s government actions seem to ensure its survival,” added Sandler O’Neill & Partners analyst Jeff Harte.

Citigroup returned to profitability in 2010, reporting $10.6 billion in net profit for the full year. Still, the full-year numbers were overshadowed by fourth-quarter results, which fell short of Wall Street’s expectations and raised questions over the bank’s investment banking strategy. The bank then hit a setback after it failed to pass the Federal Reserve’s stress test in 2012. But this year, the company’s efforts to streamline operations and its focus on developing core businesses paid off. During this year’s stress test, the bank showed it was strong enough to retain sufficient capital to continue to lend to households and businesses during severely adverse conditions.

The financial institution also reported impressive second-quarter results in 2013 with earnings increasing 25 percent, year over year, driven by higher revenues and lower credit losses. Even in the sluggish economy, Citigroup’s total deposits rose 2.6 percent, year over year. However, analysts still remain concerned about the lingering financial crisis-era lawsuits and rising operational expenses. Plus, shares remain 89 percent below the level they traded at five years ago, before the full brunt of the financial crisis hit.

On Tuesday, according to a filing made with the Securities and Exchange Commission, the FDIC offered $2.42 billion of Citigroup bonds, the last of the government’s interest in the bank. “When the transaction concludes, no U.S. government entity will continue to hold any securities in Citi issued as a result of the financial crisis,” the bank said in a written statement seen by Reuters. This sale is approximately three times larger than a similar offering of $894 million of debt the government made in February.

“We remain very appreciative of the support provided by the U.S. Treasury, FDIC and American taxpayer during the financial crisis and are pleased that their investment realized a return of more than $13 billion,” read Citigroup’s statement announcing the deal.

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