Following reports that the economic recovery is likely to be sustainable, the government has decided to withdraw its backing of Citigroup Inc by selling its stake in the company. The Obama administration stepped in with a massive bailout program to keep the bank afloat during recession, when there was a lot of pressure on many businesses and several were forced to close down.
A recent announcement by the Treasury department outlines the government’s plan to sell its 7.7 billion shares in the company this year. The sale will be undertaken in a staggered manner to prevent upsetting the delicate balance of the markets, especially the stock price of the bank.
The stake was acquired by the government in 2008- 2009 and amounts to about 27% of the total shareholding in the company. This acquisition gave the US government a substantial say in how business was run at Citigroup. The bailout was one of the largest in the US. Even after the proposed sale, the government will still have some stake in the company, to the tune of about $5 billion.
Allaying fears of investors that the whole of the 7.7 billion shares will be put on the market in one go, the government has outlined a step by step sale process, which will see a few shares being sold every month until the intended number are taken up. According to Morgan Stanley, which is advising the government on the schedule of the sale, many aspects are being considered in determining the frequency and magnitude of each sale lot.
Investors in Citigroup have always known that the government stake would be sold off at some point, but the time of sale had been unknown until these announcements. Although the fears of a mass sale have been put to rest, the share price witnessed a fall of more than 2.5% after the Treasury announcement.
If the government succeeds in pulling out of Citigroup and putting the company firmly on the track to recovery, it will be a huge victory for the Democrats. Coming on the heels of major policy decisions and changes like the health care reform, the Obama administration will be in a position to showcase the effective steps taken by it to combat the effects of the recession. Combined with the recovering economy and optimistic market sentiment, these can set the stage for an electoral victory for the Democrats.
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