Market Talk

Citigroup (C) shares fall as the government decides against trimming its 34% stake in the banking behemoth. Abrupt decision comes after the pricing of a recent secondary offering comes 10 cents below what the Treasury Department originally paid for Citi shares, meaning taxpayers would’ve lost money on the deal. WSJ has the details:

The embarrassing reversal came two days after the Treasury said it planned to sell as much as $5 billion of stock in the New York company, as part of Citigroup’s plan to pay back $20 billion in taxpayer aid the troubled bank received last year.

The huge offering encountered a lukewarm reception on Wall Street, where investors were skeptical of the company’s earnings prospects and had already spent heavily on shares of rival banks this week.

As a result, Citigroup had to sell its stock at a discounted price of $3.15 a share. That’s 10 cents below what the Treasury paid for each of its 7.7 billion shares.

Market observers expressed skepticism earlier this week when Citi said it would repay TARP, suggesting the bank was wrong-headed in rushing to pay back taxpayers and risked demoralizing investors. But Citi has argued that being a bailout recipient has hindered its ability to lure top talent.

“Earlier this week, when Citi announced its plan to repay TARP, we characterized it as a mixed blessing and noted that we were disappointed that the plan began with capital raising to repay the TARP preferreds and ended with the sale of government shares rather than the other way around,” analysts at Oppenheimer said. “In retrospect, we had no idea of our gift for understatement.”

Oppenheimer thinks there would’ve been plenty of demand for government shares at more than $4.00 a share “because it would (have) been a clear step toward a normal ownership structure. Instead, by forcing the sale of common while still having the overhang of the government, their shareholders, most prominently including the American taxpayer, have been needlessly diluted.”

That dilution is just the latest chapter in this growing saga between the government and the bank, as Citi’s already been bailed out three times.

“The nausea we feel with respect to Citigroup and our Treasury Secretary just hit a new high,” writes Henry Blodget, the former sell-side equity-analyst-turned blogger. “The fault can – and should – be laid at the feet of the man who likely has done more for Wall Street at taxpayer expense than any man in history: Tim Geithner.”

(John Shipman contributed to this post.)