A Third Bailout for Citi Sends Bank Shares Tumbling

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After several days of gains, bank stocks tumbled Friday as investors reacted to news that the government is increasing its stake in Citigroup Inc. from 8% to as much as 36%.

The KBW Bank Index fell 8.73% for the day but gained 11.3% for the week.

Traders attributed the gains in earlier days to bargain hunting by investors. On Friday, however, investors went back to expressing their concern about the health of the financial sector by selling shares, said Anthony Conroy, the head trader at Bank of New York Mellon Corp.'s BNY ConvergEx Group.

Mr. Conroy said Citi's disclosure that the federal government and private investors, including the government of Singapore and Prince Alwaleed bin Talal of Saudi Arabia, would convert their preferred stock in Citi to common shares helped drive down its share price nearly 39%, or 96 cents, to $1.50.

Matthew Shields, a trader at FIG Partners LLC, said investors were upset over the dilution of their common stock.

The New York company also substantially raised its fourth-quarter and full-year losses. (See related story.)

"Everybody's been looking at financials and asking the main question: How bad is it?" Mr. Conroy said.

"Banks have got positive cash flow, and loan losses are not as bad as people have perceived, but there was still some negative news out there, and investors are reacting accordingly."

The broader markets also fell on Citi's news.

The Dow Jones industrial average dropped 1.66%, to 7,062.93, and the Standard & Poor's 500 dropped 2.36%.

Citi's news weighed heavily on the rest of the banking sector.

Bank of America Corp. fell 26%, to $3.95. Wells Fargo & Co. fell 16%, U.S. Bancorp fell 4%, and JPMorgan Chase & Co. fell 1%.

On Friday, Wells disclosed in a Securities and Exchange Commission filing that it had suspended its bonus policy for senior executives indefinitely.

The San Francisco company also said in the filing that chairman Richard Kovacevich, chief Executive John Stumpf, chief financial officer Howard Atkins, and senior executive vice presidents David Hoyt and Mark Oman will not receive 2008 bonuses, because Wells had not met its performance goals for that year.

Regional banks stocks also suffered. Zions Bancorp. fell 14.1%, Comerica Inc. fell 9.1%, SunTrust Banks Inc. fell 7.1%, and KeyCorp fell 12.2%.

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