Bad Week for Banks Punishes Sector Funds

While Citigroup(C Quote) shuffles its boardroom deck chairs at the insistence of the U.S. Treasury, the stock price plunged 59% last week to less than $1 a share at one point Thursday.

Other financial-services companies fared almost as poorly. So for the five trading days that ended March 5, the average financial-services sector fund we track lost 10.4% of its value, excluding inverse funds that do short selling.

The government, now a 36% owner of Citigroup as of Feb. 27, cajoled Citigroup to allocate at least eight of the 15 board seats to independent members. More importantly, Citigroup announced an attempt to exchange preferred stock for common shares. All this uncertainty about the structure of the company, with quarterly losses expected to continue, has pushed the cost to insure Citigroup debt against default to an all-time high.

Pressure is being brought to bear on banks receiving government money to create initiatives to keep struggling residents in their homes. CitiMortgage, a Citigroup division, plans to lower mortgage payments to $500 a month for the recently unemployed collecting state unemployment assistance.

In another plan to take early losses before they turn into larger losses from foreclosures, Bank of America (BAC Quote) plans to modify 400,000 former Countrywide mortgages at an expense of $8.4 billion. With as many as 230,000 other customers in need of loan modification and the discovery of trading irregularities discovered from its Merrill Lynch unit, Bank of America shares dove 40% for the period under review.

A scandal may be brewing if those trading irregularities were overseen by any of the executives collecting a piece of the $3.6 billion in Merrill's pre-acquisition bonuses. As New York Attorney General Andrew Cuomo compels Merrill Lynch's former CEO, John Thain, to produce the names, Bank of America intervenes to quash the discovery. An investor group is calling on Bank of America's board to oust CEO Ken Lewis for his "disastrous missteps" surrounding the Merrill merger.