Sort of in the black

Citigroup bailout: Few believed former Treasury Secretary Hank Paulson’s promises that the US government would get its money back from bailing out troubled banks. With the state’s big investment in basket case Citigroup now in the black, those naysayers may want to prepare their apologies. But they can hold off on delivering them just yet.

As part of the Troubled Asset Relief Programme, the Treasury took a $45 billion stake in the giant bank. Today it is worth $52 billion. That’s great on paper — but actually crystallising those gains into profits won’t be so simple. Moreover, the government will still be exposed to a large and troubling chunk of Citi’s balance sheet.

Still, it is right for the government to begin thinking of ways to get some of its money back. The US retains 7.7 billion shares, or 34 per cent of the company’s common stock. The prospect of the government liquidating this huge overhang could easily stall or send Citi’s recent equity run-up into reverse. Of course, placing a large chunk at a discount or dribbling out shares gradually could minimise the damage.

Look at Tuesday’s reaction to a Wall Street Journal article suggesting Citi may sell up to $5 billion of new stock in conjunction with any government sale. The shares lost a bit more than that in value. Yet the bank would use the funds to buy back preferred stock paying a hefty 8 per cent dividend. Though this would be a good use of proceeds investors are clearly worried by the prospect of a big slug of shares falling into the market.

And even if the government can exit the share capital intact, the Tarp wasn’t the only assistance scheme that Citi availed itself of. The government agreed to assume 90 per cent of any losses in excess of $40 billion on a pool of $300 billion of assets. It received an additional $7 billion of preferred stock for this. The bank has also issued close to $50 billion — and counting — of Federal Deposit Insurance Corporation backed debt.

Without these and a host of other helping hands from Washington there’s little chance the Tarp investment would be profitable. Until Citi is fully weened from Uncle Sam’s breast, it would be too early for Paulson to emerge from retirement to take a bow. But his critics may need to brace themselves for an apology just the same.