A Strange Definition of “Profit”
As rumored over the weekend, the Treasury Department plans to sell its stake in Citigroup, amid claims that they will make $7 billion dollars for the federal government in the process.
The government received 7.7 billion shares of Citigroup in exchange for $25 billion it gave the bank during the 2008 credit crisis. It said it will sell the shares over the course of this year, depending on market conditions.
Like any investor, the government will likely hold on to its shares if prices fall steeply. However, Citi shares have steadily been rising with the broader market in recent months, which means the Treasury Department stands to pocket a hefty profit.
It’s just strange, at best, to characterize what the government would be getting out of their stake in Citi as “profit.” There’s a good reason for Citi’s increasing stock price – they benefited from historic actions from the US government, and not just through the TARP. I mentioned this over the weekend, but Dean Baker spells it out.
First, it is worth noting how the government got the shares of common stock which it is now selling for a profit. On November 23, 2008, the government bought $20 billion in preferred shares in Citigroup. It also received another $7 billion in preferred shares in exchange for guarantees on $300 billion in bad assets. At the time, the combined value of the investment in preferred shares and the guarantee on bad assets exceeded the full market value of Citigroup stock on November 21st, the last trading day prior to the deal. In other words, for the same financial commitment that the government made on that day, it could have owned Citigroup outright […]
The logic of the Post’s assertion that the profit on Citigroup stock validated the bailout is not clear. By making capital available to Citigroup at below market rates, the government effectively subsidized the income of Citigroup’s shareholders. It also allowed its top executives to make millions of dollars because they were smart enough to be able to get taxpayers to subsidize the bank. The current market value of Citigroup is $123 billion, with only $33 billion belonging to the government. This means that the government has effectively given $90 billion (@ 25 million kid-years of health care provided through the State Children’s Health Insurance Program or SCHIP) to Citigroup’s shareholders and billions more to its executives by not demanding a market price for its support.
It is also worth noting that the government has supported Citigroup through other mechanisms. The Fed created various special lending facilities that allowed Citigroup to borrow money from the government at extremely low interest rates. Since one of the main uses of this money was buying government bonds, Citigroup was essentially getting free money from the government. If it borrowed $200 billion at near zero interest and lent it back to the government by buying 10-year Treasury bonds at 3.7 percent interest, then the government was effectively handing Citigroup $7.4 billion a year for nothing. This money is not deducted from the Post’s estimate of the government’s “profit” on its dealings with Citigroup. (The Fed refuses to tell the public how much money it lent to Citigroup and other banks at below market rates.)
There seems to be a PR campaign at work here to ensure everyone that the TARP is a revenue producer. To look at 2% of the total federal commitment to the banking industry and extrapolate profits based on that is beyond misleading.