A Profit On the Citigroup (C) Bailout... Oh, Really?

While recent reports have discussed how the U.S. government is looking at a large windfall profit of around $7 billion from its upcoming sale of Citigroup (NYSE: C) shares, we would argue that nothing could be further from the truth.

Yes if you look just at this transaction, the math is easy to follow. The U.S. has 7.7 billion Citigroup shares at $3.25. If they are sold at yesterday's closing market price of $4.18 per share, then you get a profit of $7.2 billion. In addition, the government can see other profits from warrants that are still owned. Those warrants have exercise prices of $10.61 to $17.85 per share, so they may never be worth any money over their 10-year life.

While on the surface it looks like a great trade for Tim Geithner's 'Treasury & Co', the bailouts that Citigroup is a part of are estimated to cost the tax payers $100-$120 billion and that's not including Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

Beyond the Treasury, you also have to look at the role the Federal Reserve has played in supporting the system. Where would Citigroup, or the system for that matter, be without the Fed supporting every market imaginable? All the Fed's actions has caused its balance sheet to swell to a inconceivable $2.3 trillion. What the ultimate cost will be from this unprecedented action could be rampant inflation and a still-fragile system that can not support itself.

So the next time you read reports about the profits the U.S. government is making off all these bailout deals, just laugh. Be thankful that our financial system has recovered, but be cautious that the ultimate price for these action still needs to be paid.

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