Citi bank was returned to the private sector by the final sale of Citi stock held by TARP. In the crisis, the initial TARP investment in Citi – the ten billion given to a dozen major banks — was quickly seen to be insufficient. Citi was deemed a systemically-important failing institution, and not only given tens of billions more in TARP aid, but also was allowed to exchange preferred stock investments for common stock, reducing the cash that Citi had to pay out but exposing the government to more risk. When I was involved in valuing the investments a year and few months ago, our model and market prices implied that the government was unlikely to recoup its investments. Now, the government has sold the last of the stock and locked in $12 billion in profits – ie. in lower future taxes or higher future government resources for you and me. The initial investment was $45 billion, so this is about a 13% annual rate of return, which seems like a good deal for the taxpayers, at least ex post (at least ignoring the other Federal and Fed interventions). But ex ante? Was it a bet that we won with fair odds, or were the odds stacked in our favor? Did the government’s size and deep pockets create an opportunity in the face of “stressed” markets? We may never know for sure, but winning big is some evidence in favor of the argument that the odds were in out favor.
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