THE BASIS POINT

Treasury To Profit From Citi Bailout

The US Treasury will be selling its remaining shares in Citigroup, not only exiting ownership but making a profit on its investment. It found buyers for 2.4 billion shares at $4.35 a share for $10.5 billion of profit. (Can they please manage my stocks?) At this point the biggest private stakes left on the Treasury’s ledger are in General Motors and AIG…although the fate of Fannie & Freddie must still be figured out. CitiMortgage was the #5 residential lender for the first half of 2010. The Treasury had already announced $42.8bn in proceeds from the sale of 4.4bn shares to the end of October, including dividends, the repayment of preferred shares and interest.

Speaking of large banks, Bank of America (#2 residential lender during the first half of 2010) remains committed to shedding non-core assets, even after the company raises the extra equity required as part of its exit from the TARP per a Dow Jones. It “has committed to selling assets it thinks are no longer essential to its business or don’t fit the bank’s strategic goals.” Recently it sold a huge stake in BlackRock and sold the right to purchase additional shares in China Construction Bank. For example, anyone looking to buy BofA’s Balboa insurance unit, which sells so-called creditor-placed coverage (a type of home insurance that kicks in when a house enters foreclosure or homeowners stop paying for their own insurance) should give them a call.

Yesterday we had some nice improvement in MBS prices, which unfortunately has basically been given back this morning. Money managers were in buying MBS’s, and traders reported that originators were buying back hedges. (Let’s hope that they’re not putting those hedges back on this morning at worse levels.) MBS volume was significantly below normal, and MBS prices closed from 3/8th to nearly 3/4 of a point higher along 5s down through 3.5s, respectively, while higher coupons gained just a few ticks.

But here on Pearl Harbor Day rates have moved higher here due to the tax cut extension news: Obama agreed to extend the Bush tax cuts. That compromise also bought Obama the bargaining chip to extend unemployment for another 13 months and cut the payroll tax by 2%. Of course this does little to help the deficit and therefore increases Treasury issuance, but takes pressure off of the Fed and should boost GDP. The US headlines also overshadowed news that the EU committee decided there would be no immediate relief packages for the likes of Spain and Portugal.

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