Investors are cheering, Citigroup shares are up 4% on Tuesday afternoon, after the Treasury Department sold its remaining stock in Citigroup for $10.5 billion.   These sales bring the country’s 3rd-biggest bank a step closer to independence from the government - which all began in 2008 with a $45 billion bailout.  The Treasury said its average price for selling 7.7 billion Citigroup shares was $4.14.  Having acquired the shares at a conversion price of $3.25, the government gained about $6.85 billion.

Investors are cheering, and Citigroup stock is rising - shares last traded at $4.64 on Tuesday afternoon, up more than 4% from the previous day’s close.  “We think the announcement helps turn the headwind of government ownership into a tailwind,” Nomura Analyst Glenn Schorr said in a Dec. 7 research note.

Citigroup now could get an even bigger boost, from investors who have no choice but to buy index funds.  With the government exiting from Citigroup, several indices - including the S&P 500 - will have to adjust their weightings in the bank.  That, in turn, will force money managers that track such benchmarks to buy Citigroup.  Schorr estimated that index managers will have to purchase 486 million shares from December 2010 through June 2011.

“Government ownership has been one of the things holding investors back,” Mr. Schorr said in the note. “We expect the deal will be well received and should bring some of those waiting on the sidelines to the market.”   [NYT Dealbook, Bloomberg, 12/7]