Citigroup's Move Below $5 Could Trigger Major Selling

Citigroup's stock plunged below$5—a 13-year low—and the banking giant's troubles may be just beginning.

Citigroup Center
Citigroup Center

Most institutional investors and pension funds are barred from owning stocks below $5. So if Citigroup's stock remains below that level, it could trigger a wave of selling that would send the share price even lower.

"That's the danger of crossing that $5 threshold," says Owen Malcolm, senior vice president of Sanders Financial Management in Atlanta. "They're (Citigroup) already in trouble. It could get worse."

Money managers don't necessarily have to sell Citi immediately. But they would have to get out before the end of the quarter if the stock doesn't recover and may opt to do so now to mitigate potential losses.

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"They've got five, six weeks to make decision on whether they're going to get out," Malcolm says. "There's still a lot of institutional ownership of Citigroup. That could change quickly if they have to be out at the end of the year."

Citi shares tumbled again Thursday despite news that Saudi Prince Alwaleed bin Talal plans to increase his stake in the company to 5 percent from less than 4 percent. The prince said the bank's shares were "dramatically undervalued" and voiced support for the current board and CEO Vikram Pandit.But Alwaleed's investment position didn't change investors' view of the firm, which has been hammered by the credit crisis like the rest of Wall Street. (See report regarding Citi's plea to the SEC, left.)

Analysts were watching the stock price closely to see how it would affect pension funds that hold Citi shares. Investors generally don't like the chances of recovery for a major company's stock once it closes below $5.

"It's getting to the point where it's make-or-break time for Citigroup," says Ryan Detrick, an analyst at Schaeffer's Investment Research in Cincinnati. "It doesn't look promising."

For Citigroup, a Dow component and one of the world's biggest financial institutions, the reversal in its stock price is stunning. The stock was trading at over $20 a month ago and $31 a year ago. It has plunged nearly 90 percent in nearly two years.

Citigroup shares have lost one-third of their value in the first three days of this week as investors worried that Pandit's plan to cut expenses by 20 percent and eliminate 52,000 jobs won't restore the bank to health.

Citigroup has lost $20.3 billion in the last year and taken tens of billions of dollars of writedowns on mortgage and other toxic debt. Analysts expect it to lose money in the fourth quarter, and some don't expect it to be profitable in 2009.

—Reuters contributed to this report.