This report was written by CNBC producer, Robert Hum
Futures are indicating that a very weak February will end on a sour note.
Details of the government’s plan to convert its preferred shares to common shares in Citigroup have pushed stock futures sharply lower, with shares of Citi and other banks under pressure in pre-market trading.
Futures accelerated their declines even more, falling another 10 points lower to the lows of the morning following a weaker than expected Q4 GDP revision. The Commerce Department reported Q4 GDP fell 6.2%, down from the previous estimate of 3.8%. This was the biggest decline for GDP since 1982. The street had expected the revised GDP number to decline by 5.5%.
European markets are also significantly weaker this morning, with the major markets in France, Germany, and the U.K. all down 3%-4%.
Citigroup is trading down nearly 40% at $1.56 amid extremely heavy volume, with well over 100 million shares already traded pre-open. On a normal day, about 300 million shares of Citigroup change hands - but that is for an entire day! At this share price, Citi is hovering around its lowest levels since the fall of 1990.
Under the terms of the agreement with the Treasury, up to $25 billion of the U.S. government’s preferred stock will be converted to common shares. This could give the government a stake of up to 36% in Citigroup. The exact size of the conversion will be dependent on how many private investors will offer up their preferred shares to be converted into common shares, as Citi has also announced it will convert up to $27.5 billion in preferred shares that are currently owned by private investors. The number of government-owned preferred shares converted would have to be identical to the number of privately-owned preferred shares that are converted to common shares. Citi will convert the preferred shares at a price of $3.25 per share.
The deal would give the bank more needed capital, but in the process, would significantly dilute the ownership of current common shareholders, causing shares of the common stock to plunge pre-open. In fact, the equity stake of current common stockholders could be cut to 26%.
Other banks are sharply lower on the Citi news, as investors worry that the Citi plan could serve as a model for government deals with other banks.
In pre-market trading, Bank of America is down 19%, Wells Fargo is down 13%, SunTrust Banks is down 13%, Keycorp is down 10%, U.S. Bancorp is down 9%, JPMorgan Chase is down 5%, PNC Financial Services is down 5%.