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Citi’s offering shows its woes

Shares sell cheaply as problems go on

Many questions persist among investors about the health of Citigroup, among the banks hit hardest by the credit crisis. Above, Citigroup headquarters in New York City. Many questions persist among investors about the health of Citigroup, among the banks hit hardest by the credit crisis. Above, Citigroup headquarters in New York City. (Richard Drew/Associated Press/File 2009)
By Stephen Bernard
Associated Press / December 18, 2009

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NEW YORK - Citigroup’s surprisingly low pricing of a stock offer this week provides a clear sign investors are still nervous about the banking giant’s ability to regain its financial health.

On Wednesday, Citigroup said it would sell 5.4 billion shares of stock at $3.15 each to help repay $20 billion in government bailout loans. That price was 9 percent below where shares were trading before the announcement.

“The market is not buying the Citi story right now,’’ said Alois Pirker, at the financial consultancy Aite Group.

The government also balked at the deal, stepping away from selling a portion of its nearly 34 percent stake in Citigroup.

Citigroup shares fell 7.2 percent to close at $3.20 yesterday.

Analysts say Citi didn’t have much choice but to take the hit of selling at a low price because of uncertainty surrounding the bank. Citi still must demonstrate it can maintain profitability for an extended period of time.

Citigroup has been among the banks hardest hit by the credit crisis. It earned $101 million during the third quarter before accounting for preferred stock dividends and the debt exchange that gave the government a stake in the bank. Including those items, Citi lost $3.24 billion.

The bank has to deal with loan losses that continue to pile up. It set aside $8 billion during the third quarter to cover them.

Citi must also find buyers for some of the risky investments that got it into this predicament in the first place - Citi separated its risky assets into a separate division earlier in the year.

On top of that, Citi now has to fight fraud claims by a key investor. Abu Dhabi’s main sovereign wealth fund is looking for compensation or to exit a $7.5 billion investment in Citigroup, saying the bank misrepresented its health in late 2007.

With all those questions, trying to sell shares at a higher price could have led to a bigger disaster: not enough investors willing to buy into the $17 billion common stock offering - the largest equity offering in history.

Citi had to get the deal done or else it would be left further behind competitors, analysts say.

Already struggling to keep top talent and draw in new customers, Citi would have been the only big bank stuck under restrictions tied to receiving government bailout money, including caps on employee compensation.

The government was planning to sell 20 percent of its stock at the same time Citi sold new shares. At $3.15, the government would have lost $158.7 million on the sale, so it opted not to participate. However, the government still plans to unload all of its 7.7 billion shares, which it acquired at a price of about $3.25 each, during the next year.