Citigroup Bailout Pays Taxpayers Three Times as Much as S&P 500

By Michael J. Moore and Jeff Kearns

June 12 (Bloomberg) -- U.S. taxpayers have reaped a 7.5 percent return on the $45 billion used to rescue Citigroup Inc., more than three times as much as if the money had been invested in the Standard & Poor’s 500 Index.

Chief Executive Officer Vikram Pandit, summoned by Congress in February to explain his bank’s use of the funds, vowed to “make this a profitable investment for the American people.” The return since the government first purchased a stake in the bank on Oct. 28, which includes dividends, compares with 2.4 percent for the S&P 500 on that basis.

“Anything that they make is positive,” said Frederic Dickson, who manages $17 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “After making a huge investment, that seems, on the surface, like a reasonable return for taxpayers.”

The government pumped $25 billion in rescue funds into the New York-based bank in October and another $20 billion a month later. Dividends on preferred shares linked to that money total about $1.6 billion, according to data compiled by Bloomberg. Returns have also been boosted by the tripling of the stock price since March, which will benefit the government through the planned conversion of as much as $25 billion of its preferred shares into common stock.

The conversion will give the government a 34 percent stake in the bank, which will also exchange as much as $33 billion of preferred securities not held by the government.

Share Conversion

The difference between the $3.25 conversion price on the preferred share swap and the closing price of $3.48 at 4 p.m. in New York Stock Exchange composite trading yesterday would yield a profit of $1.77 billion on a full conversion. The transaction will eliminate the dividend, which ranges from 5 percent to 8 percent.

Citigroup racked up more than $100 billion of credit losses and writedowns during the global credit contraction that began in 2007 and is selling businesses and reducing head count to preserve capital.

The government’s $45 billion investment in Bank of America Corp. has been less lucrative. The Charlotte, North Carolina- based company has paid $1.1 billion in dividends on the Treasury’s preferred shares, CEO Kenneth Lewis said yesterday in testimony before the House Oversight Committee in Washington yesterday. That means taxpayers have received 2.5 percent on their $45 billion bailout of the bank through the Troubled Asset Relief Program as of the end of the first quarter.

“The returns came a little bit quicker than one would have expected,” said William Fitzpatrick, who helps manage $1.6 billion at Optique Capital Management in Milwaukee, Wisconsin. “It looked like the end of the world three months ago, but the truth is once our financial system stabilized the opportunities were enormous, and I think the taxpayer will participate in those types of returns.”

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net.