US decision to keep its Citigroup stock shows poor timing

Citigroup stock dropped another 7 percent Thursday.

WASHINGTON (AP) — Everything was set: The government would begin selling its stake in Citigroup, and the bank would sell new stock and pay back bailout money. Both sides could untangle a relationship that neither saw as ideal.

But the Treasury Department was forced to reverse its plan to unload its Citi shares, showing that both the government and the bank badly misjudged investors’ appetite for the bank’s stock.

Citi was competing with Bank of America and Wells Fargo, both of which were also selling stock to raise money and were considered in better financial health than Citigroup. Their offers were more warmly received by investors.

Plus, Citi’s offer came on the same day that a major investor, the main sovereign wealth fund of Abu Dhabi, filed a multibillion-dollar lawsuit accusing the bank of misrepresenting its financial health in 2007.

Banking industry analysts said Thursday the government should have seen the cool reception coming.

“Either these guys didn’t have any advice, or they didn’t take the advice, or the whole thing was done in such haste that they didn’t even consider it,” said Christopher Whalen, managing director of the financial research firm Institutional Risk Analytics.

The government has been eager to unload its stake — and under pressure from the bank to do it, too — in order to show the U.S. has confidence in Citi, which holds the largest remaining chunk of bailout money.

Disentangling itself from Citigroup would help the Obama administration fight the perception that it’s been coddling Wall Street banks.

“All else being equal, we’d rather not own a chunk of Citi,” said Douglas Elliott, a senior fellow at the Brookings Institution and former investment banker. “It’s not what we want our government doing.”

Treasury declined to discuss the details of its decision.

Citigroup had announced plans to sell 5.4 billion shares of stock at $3.15 a share to help repay $20 billion in government bailout money. That price was 9 percent below where shares were trading before the announcement.