Federal Reserve Makes $14 Billion Profit Off Financial Crisis So Far; Banks 'Too Big to Fail' Have Grown Even Bigger

U.S. Discusses Selling Its 34% Stake in Citigroup to 'Investors'

September 15, 2009

Bloomberg - The U.S. Treasury Department and Citigroup Inc. have begun discussing how to sell the 34 percent stake that the government acquired in the rescue of the bank, people familiar with the matter said.

The Treasury, which owns 7.69 billion common shares after a recent preferred-stock conversion designed to shore up the bank’s capital, may start unloading the stake as soon as October, one of the people said. It aims to sell the holdings over the next six to eight months, the person said.

A sale, a year after Lehman Brothers Holdings Inc. filed for bankruptcy, would bring Citigroup Chief Executive Officer Vikram Pandit closer to extricating the company from the bailout program while allowing the government to claim a profit. Because the New York-based bank’s stock price has gained since $25 billion of bailout funds were exchanged for common shares, the Treasury is sitting on a paper profit of $9.77 billion.

“Given the conversion and what’s happened to the stock price, it is likely that the government would make money on it,” said Moshe Orenbuch, an analyst at Credit Suisse Group AG who rates the shares “neutral.”

Citigroup’s stock closed at $4.52 a share yesterday, a 39 percent premium over the Treasury’s conversion price of $3.25. The shares slipped to $4.42 in German trading today.

The planning is in the early stages, and some transactions may need regulatory approvals, the people familiar with the matter said. Under one scenario, the shares would be sold to public investors in blocks over six to eight months. In another, the government may sell a small amount of stock daily or weekly, said the people, who declined to be identified because the talks are private. Under a third option, the shares would be sold at once in a managed offering.

Treasury spokesman Andrew Williams and Molly Meiners, a spokeswoman for Citigroup, declined to comment.

Citigroup, the third-biggest U.S. bank, received $52 billion in bailout aid; a sale of the common stock [for $25 billion] would leave the Treasury with a $27 billion investment [editor's note: this is a loss to U.S. taxpayers of $25 billion]. That stake is in trust-preferred shares -- a class of securities that ranks senior to common stock and junior to most debt.

If the Treasury sells its common shares through a managed offering, the bank may piggyback on the effort by simultaneously issuing new shares to help pay off the remaining bailout funds, one person familiar with the matter said...

Other bailed-out banks, including Bank of America Corp., based in Charlotte, North Carolina, and San Francisco-based Wells Fargo & Co., have pledged to repay TARP money.

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, repaid TARP funds in June. In a speech yesterday, President Barack Obama said taxpayers have earned a 17 percent return so far on stakes repaid by banks.

Richard Parsons, chairman of Citigroup’s board, said in an interview yesterday in New York with Bloomberg Television that he had “every confidence that Citi will be able to exit the TARP program, and actually be able to give the American taxpayer a decent return.” He declined to provide a time frame...

Banks 'Too Big to Fail' Have Grown Even Bigger

August 28, 2009

Behemoths Born of the Bailout Reduce Consumer Choice, Tempt Corporate Moral Hazard

Washington Post - When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show...

Federal Reserve Makes $14 Billion Profit Off Financial Crisis So Far

August 30, 2009

Financial Times - The Federal Reserve has made a $14 billion profit on loan programmes that have provided hundreds of billions of dollars in liquidity to the financial system since the start of the crisis two years ago, according to Fed officials.

The internal estimate is based on the difference between the fees and interest on the lending facilities and the interest the Fed would have earned had it invested the funds in three-month Treasury bills.

The central bank earned about $19 billion in income from charging interest and fees to financial institutions and investors that tapped the new facilities to obtain much-needed funds during the turmoil. The interest the Fed would have earned by investing the same amount in T-bills was an estimated $5 billion, leaving a $14 billion gain since August 2007.

The Fed assessment underlines the possibility that other central banks could make a profit on their crisis-fighting measures – at least before adjusting for the risk they assumed...

The Fed declined to comment.

Critics have warned the central bank might lose money on its vast efforts to avoid financial collapse and ease financing conditions for the economy as a whole.

But the internal estimates suggest that the Fed might well make a cash profit on the crisis. They show that the fees earned on the loans were high enough to more than cover defaults to date – leaving a sizeable cushion against future losses on these loans and other parts of the Fed portfolio.

Some politicians have criticised the Fed for using billions of dollars of public funds to support the market and stricken groups such as AIG and Bear Stearns. The Fed’s balance sheet has ballooned from $800 billion in 2007 to about $2,000 billion. A recent Gallup Poll found the Fed had the worst public approval rating of nine government agencies, even lower than the tax authorities.