While Citigroup ( C) 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) 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.
Wells Fargo ( WFC), a recipient of $25 billion in Troubled Asset Relief Program, or TARP, funds and other firms receiving TARP money are being strongly discouraged to pay taxpayer money to shareholders. To save $5 billion and comply with a Federal Reserve directive to "reduce or eliminate dividends," Wells Fargo cut its dividend by 85% to 5 cents a share. Shareholders punished the stock, driving it down by 44%. Similarly, U.S. Bancorp ( USB), a 39.6% decliner last week, cut its quarterly dividend by 88% to a nickel a share. CEO Richard Davis clarified that the dividend cut wasn't required by its regulator but simply the best way to return TARP funds as soon as possible. As for financial-services funds, at 300% leverage, the Direxionshares Financial Bull 3X Shares ( FAS), down 33.6%, fell the furthest. Its inverted counterpart, Direxion Financial Bear 3X Shares ( FAZ), soared 42.9%. The second-worst performer, at 200% leverage, Rydex 2X S&P Select Sector Financial ETF ( RFL), lost 27.3% of its value. Beyond just the banks, looking at the whole financial sector, the 150% leveraged ProFunds Financials UltraSector ProFund ( FNPIX) shed 18.21%. The largest percentage decline among the fund's holdings, minus 76.1%, came from insurer Conseco ( CNO). Conseco reported a preliminary $406.8 million loss in the fourth quarter, five times worse than the prior-year's result, and delayed the release of the annual report until March 17. The report may acknowledge an auditor concern about Conseco's "ability to continue as a going concern" due to holding-company liquidity and investment-portfolio losses.
Other insurance company holdings on the downside include minus 55.1% from Ambac Financial Group ( ABK), minus 54.3% in The Phoenix Cos ( PNX), minus 49.6% in MetLife ( MET), and minus 45.6% in Lincoln National ( LNC). MetLife and other life insurers that sold equity-indexed, variable annuities with guaranteed minimum returns may have to raise additional capital to cover potential payouts. Lincoln National and other life insurers bought thrifts for the sole purpose of qualifying for TARP funds to get government capital infusions. MetLife, owner of the C-rated MetLife Bank NA since 2001, has yet to say whether it will apply for TARP assistance. The worst-performing real estate investment trust shares held by the ProFunds Financials UltraSector ProFund, General Growth Properties ( GGP), lost half its remaining value, down 51.5%. This second-largest mall owner, featured two weeks ago, is selling Boston's Faneuil Hall and New York's South Street Seaport to forestall bankruptcy.
On Friday, TheStreet.com Ratings Senior Bank Analyst, Philip van Doorn, flirted with the question, "Is it safe to buy bank stocks now?" He identified potential bargains that may be worth considering based on their capital strength, asset quality, and dividend yields. With one-week returns averaging minus 13.5%, the market is saying, "Maybe not just yet." For more information, check out an explanation of our ratings.