There are a couple of ways to look at the decision by the Treasury Department to sell its stake in Citigroup, with one being somewhat positive and predictable, and the other having a lot of downside possibilities built into it.
First the positive. This is counter to the decision made by the Treasury, because it would mean selling more of the stake upfront and taking advantage of what is a known entity, and that is they would make a nice profit now by selling it right away with guaranteed returns.
The negative of that plan would be the additional fees incurred by the Treasury Department selling in a large block like that, but that’s a small price to pay for a predictable pay day.
Concerning the planned way of selling the shares incrementally, that has a lot more risk to it than it sounds, as Citigroup, while enjoying a good beginning in their share price in 2010 so far, is a highly volatile company which can move up in down in big swings on the slightest bit of negative or positive news, and that makes them a huge risk over the short term, which the planned divesting of the shares by the Treasury Department by the end of 2010 is.
The bottom line in this is the Treasury Department will take a big hit politically and financially if Citigroup starts to plunge in value at the time they’re going to sell the shares. What would probably happen at that time is they would decide to hold until a better price is available, but that would very easily result in the Treasury holding on to the shares much longer than the promised period to sell them, which could also end up putting downward pressure on the price, as most investors consider it a positive event to have the government out of ownership in Citigroup stock.
With a lot of analysts and investors already believing the sell of the shares of Citigroup are already built into the price of the stock, it doesn’t make a lot of sense for the Treasury Department to hold the shares, when they have a guaranteed profit now.
Even though Citigroup is expected to rise in price, it can’t be considered a certainty over the rest of 2010 by a long shot. The fundamentals haven’t changed much and they still need to get rid of poorly-performing assets via their Citi Holdings unit.
If the Treasury were to sell the stock immediately, the market could absorb it and any reaction short-term would quickly be forgotten and adjusted to, and the whole debacle laid aside.
That seems like a better idea than taking a chance every time the Treasury begins to sell the shares at their allotted time and having intense media scrutiny describing whether it’s being done at a profit or loss.
