The U.S. Government - The Mother of All Investors

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by Dan Olson, Analyst at Learning Markets

Imagine a single insider sitting on 1.5 billion shares of Citigroup ( C ) stock that has made it clear to the markets that it intends to unload every single share it owns, as soon as it can. At today's price of around $3.71 that's roughly $5.5 billion of Citigroup's market capitalization spewing into the markets. Significant, perhaps?


That shareholder is, of course, the Treasury. They announced plans to share all of their holdings in April with the help of Morgan Stanley. The next largest shareholder in Citigroup is State Street Corporation, with a reported 704 million shares outstanding, or half of what the Treasury owns. Talk about the mother of all insiders!

Learn more about insider trading in this video: An Inside Look At Insider Trading

Both the Treasury and the Fed have made it clear that they plan to be very careful about when and how to dispose of the assets they own, especially when these asset sales affect publicly owned corporations. But no matter how measured their approach, the transactions are bound to have an impact on the stocks - even if all it does is signal to investors their belief that the economy in general, or these companies in particular, are now stable enough to withstand the shock of a major sale.

It's worth noting that the Treasury now expects to make money, not lose money, on the $245 billion it invested in banks through TARP; and they've said so in their monthly reports. You can see all of their holdings and all of their transactions, including planned sales and interest and dividend payments, at FinancialStability.gov . There you will see that most of the TARP money was used to make investments in preferred shares in banks.

The Federal Reserve and the Treasury are both sitting on a huge war chest of assets the likes of which we have never seen. We're talking about over a trillion dollars in mortgage-backed securities alone at the Fed, and hundreds of billions of dollars of assets at the Treasury.

According to a report [pdf]compiled by the Congressional Oversight Panel responsible for overseeing TARP transactions and asking the tough questions, "after Treasury completes all of its TARP purchases [in October of 2010], it will hold a massive pool of financial assets likely worth hundreds of billions of dollars, and the process of unwinding some of these holdings may continue for a number of years."

Some of the largest assets include the aforementioned Citigroup stock and also $46 billion in AIG preferred stock and $61 billion in shares and debt in GM and Chrysler.

The COP report continues: "These principles may sometimes be at odds with one another. For example, the most profitable moment to sell a TARP asset may not be the moment that best promotes systemic stability or the moment that best serves a particular institution."

But already the Treasury announced that it intends to conduct public auctions to sell warrants it owns in Wells Fargo ( WF ) , Comerica Inc., Valley National Bancorp, Sterling Bancshares, Inc. and First Financial Bancorp.

In April the Treasury sold warrants it owned in PNC Financial Services Group ( PNC ) valued at $324 million.

In the case of the Federal Reserve, they own $1.12 trillion in holdings of mortgage-backed securities and $167.6 billion of agency debt securities. The Fed made it clear in its annual report, released yesterday, that it doesn't intend to sell any of these securities until the economy stabilizes. But it can't hang onto them forever. When they do start to unload one thing will be certain: the Fed thinks the economy has stabilized. In fact, most suspect the asset sales to begin immediately after the Fed finally decides to raise target rates.

We suggest that investors pay close attention to the disposition of these assets over the next 12-24 months. While we don't think they necessarily present individual investment opportunities or risks (except perhaps in the case of a few outliers like Citigroup, AIG or PNC), they do signal broad economic turning points and are well worth watching. 

Learning Markets offers daily articles, videos and investing guides - for free - about everything from investing in stocks and options to trading currencies in the forex market and more. Visit LearningMarkets.com to learn more about investing and to interact with other investors just like you.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: C , PNC , WF

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