A few days ago, we flamed Citigroup and Tim Geithner for once again screwing taxpayers with the bungled TARP exit.

A Wall Street friend writes to say that our scorn for Citi was actually misplaced, that it was all the Treasury's fault:

Citi management has been responsible for countless prior sins, but this one belongs to Uncle Sam.

I've been negative on the stock, in part because being that deep in hock to the government creates unpredictable, unquantifiable and open ended risk. So professionally, this week's debacle was great for me. But as a taxpayer/shareholder of Citi I'm totally outraged and this whole thing is an example of how this mindless popular outrage at "Wall Street" for all the world's problems creates adverse consequences that hurt everyone.



Start with the simple fact that the most unusual and disagreeable fact about Citi versus all the other troubled banks out there was that the government owned a third of the shares. I can't tell you how many people say "We won't buy it till they're out."

So in the fall, some 38 BILLION shares trade in the market at above $4. The Singapore government sells more than a billion shares for a $1.6B profit and the Kuwaiti government sells over a billion shares for a $1.1B profit. Had our government sold our shares, we could have had a $5-$6B profit. All the hedge funds were eargerly awaiting a $5-$10 billion block trade in the stock, thinking that it would be a positive catalyst. We were all constantly wondering "Where is it? What are they waiting for?"



Surely this would have been the rational thing to do. The government would still have effective control because the TARP preferreds and the ring-fence agreement [in which the government guaranteed some Citi asset losses] were the mechanisms of control. But selling the common would have been great for everyone. The government could have said "See. Partial Victory. We got most of our money back at a profit." Citi. could have said, "See, we're making progress on our privatization." It had WIN/WIN written all over it and the market would have embraced it and made Citi's access to capital to repay TARP a lot easier.



Well... Treasury didn't want to do it that way. Instead, they insist on holding the stock until the preferreds are repaid. This dramatically limits Citi's universe of buyers.

Next, they don't give them any break on the consideration for the ring fence. Normally when you cancel an insurance policy you get a refund.... Next, let's make them do it the week before Christmas, oh yes and then--just to put the cherry on top of the whole confection--let's pressure Wells Fargo into doing a $10 billion stock deal right as we're trying to build the deal book.... [Citi was trying to sell an extraordinary amount of stock--$17 billion--so the news that another $10 billion of Wells Fargo would be sold made it harder to find buyers for the Citi stock.]

Could the Treasury have made it any more difficult for Citigroup? Its like one of those old Westerns where the guy walks into a bar and the bad hombres there pummel him for the next 45 minutes until every stool and bottle has been broken over his body.

And the sad thing, aside from the fact that the taxpayers may never see $4.50 again, is that it makes capital harder to raise and therefore more expensive for everyone. That it turn makes credit more constrained and expensive for all the borrowers.



This whole thing was an outrage. I can't think of a single reason, other than maybe just dumb, blind anger at "Wall Street" for why one would have acted the way the government did.