In a striking reversal of its attempts to unwind the government's financial stakes in big banks, the Treasury Department has backed out of plans to sell its 34 percent stake in Citigroup Inc.
The move came after investors responded tepidly to a massive stock offer by the New York-based bank. Citi said Wednesday it will sell 5.4 billion common shares at a steep discount to raise the cash it needs to repay $20 billion of the $45 billion in government support it received to weather the financial crisis.
Citi is the last remaining Wall Street bank in which the government still owns a major stake. Treasury's move underscores the Obama administration's halting progress in drawing back the tens of billions of dollars it invested to stabilize the banking sector.
In what it called the largest equity offering in history, Citi is selling the common stock at $3.15 apiece, an 8.7 percent discount to Wednesday's closing stock price. The bank also is selling 35 million tangible equity units, which can be converted into common stock at a later date, for $100 each.
The government converted $25 billion of its Citi bailout into a 34 percent equity ownership stake in the bank earlier this year. The government paid $3.25 a share for its stake, which means it would have lost 10 cents a share in the offering.
The government was planning to sell 20 percent of its stake at the same time Citi was selling new shares. At a price of $3.15, the government would have lost $158.7 million on the sale.
"Based on today's offering price, Treasury has decided not to participate in the equity offering," said a department official familiar with the matter who spoke on condition of anonymity because she wasn't authorized to discuss it.
The discount reflected investors' continued uncertainty about Citi's financial strength. Analysts believe the bank has benefited from one-time sales and government subsidies but may not yet have repaired its balance sheet and returned to profitability.
The Treasury Department agreed to wait 90 days after the completion of the offering to sell any of the 7.7 billion common shares that it owns. The government has said it plans to sell the entire stake next year.
Treasury Secretary Timothy Geithner reiterated this week that the U.S. does not want to be a shareholder in companies. But Treasury's decision to hold its stake shows that the government, too, believes Citi may not be strong enough to stand on its own. It also preserves one of the administration's few remaining bits of leverage in negotiations with the banks.
President Barack Obama called the CEOs of major banks to the White House Monday to press them to lend more and support his overhaul of financial regulation. He said the banks benefited from taxpayer bailouts, and should do their part to support economic recovery.
Obama and the bankers called the meeting productive, but Obama failed to extract any concrete promises on the issues he raised. A day earlier, he had gone on TV to call the bankers "fat cats" who "don't get it."
Citi was the only one of the 12 banks whose CEO did not attend the meeting. It said CEO Vikram Pandit was tied up with the announcement about repaying the first $20 billion of its bailout. Chairman Richard Parsons was to attend the meeting, but ended up dialing in from New York because of inclement weather.
Citigroup announced the offering on Monday, shortly before Wells Fargo & Co. announced plans to raise capital through a public stock offering to pay back its own government bailout loan. The San Francisco-based bank priced a $12.25 billion offering of common stock on Tuesday.
The offerings followed a share sale by Bank of America Corp. earlier this month. The Charlotte, N.C.-based bank, which named its consumer banking chief as CEO Wednesday evening, raised $19.29 billion to help pay back $45 billion in government bailout funds.
Citigroup said once the offerings are complete and it repays the $20 billion, it will no longer be deemed a recipient of "exceptional financial assistance" under TARP, and therefore won't be subject to some of the strict executive compensation rules attached to its bailout.
The repayment may boost Citigroup's image. It also will save the bank $1.7 billion a year in dividend payments. However, the capital raise significantly dilutes current shareholders' stakes.
The Washington Post reported late Tuesday that Citi had received a special tax break to help it exit the bailout. The tax change saved Citi $38 billion.