As details emerge about the federal government’s pending sale of billions of dollars worth of Citigroup (NYSE: C) stock, many have raised questions about the stock’s outlook in the post-bailout world.
The U.S. treasury purchased its massive pile of Citigroup stock at $3.25 per share. The company now owns 7.7 billion shares worth of Citigroup stock valued at $4.25 each, giving the government paper profits of $7.7 billion. The final profit that the government gets off the deal will depend on Citigroup’s share prices of the course of its extended sale.
Although Citigroup’s stock price has trended upwards during the last few months, there’s no guarantee that it will continue to increase as the federal government pumps large amounts of Citigroup stock into the market. There’s also the threat of financial reform which could cut Citigroup and other bank’s profits via a new wave of regulation.
Wall Street generally believes that the impact of financial reform on banks will be relatively moderate for banks as news reports suggest the bill is being watered down to become more politically palatable, but it’s possible that Democrats will try to get another major legislative victory in before the November elections by passing a partisan version of financial reform before the mid-term elections.
The reform likely won’t send shockwaves through the financial sector and it won’t be a fundamental rethinking of how the financial industry works, but in the stock market, perception is reality. Discussion of financial reform and negative sentiment toward the regulation on behalf of those involved in the market and business news media will likely depress any real growth in financial stocks until the legislation passes.
Americans really didn’t know what was in the health-care bill, but populist outrage against the legislation negatively impacted the stock value of health-care stocks. It’s probable that a similar outrage will occur about financial reform legislation as discussion of the legislation heats up in Congress, depressing financial stocks including Citigroup’s.
