Citigroup's TARP Payback

A CNBC article today explained how Citigroup plans to pay back $45 billion in TARP funds. This payback would allow Citigroup to completely exit the TARP program. Citigroup plans to issue $20 billion in new common stock shares to fund this payback. On December 9, Citigroup’s stock price dropped by 2.05%, mainly because the $20 billion in new common shares will dilute current shares, decreasing their value. According to a “Trader Talk” article on CNBC, Citigroup would “need to sell about 5.5 billion shares at $3.75 (currently 3.83), which would dilute shares by about 20%”

This presents the issue on how to capitalize on this 20% dilution. Could a short sell, put purchase, or call sale help MII profit off of this change? Or is the inherent risk in this event already factored into the current stock price?

The idea of a $20 billion stock offering has been met with much opposition. The opposition believes Citigroup can repay its TARP funds with cash, and not through a stock offering. Many insist that there must be another way to repay TARP funds with little or no harm to shareholders.

According to CNBC, the United States government owns about 33% of Citigroup’s shares. Exiting the TARP program would alleviate Citigroup from government control, but since the government is so heavily invested in Citigroup, Citigroup’s TARP exit strategy is more complicated than most other banks.