....Shares of financial companies plunged after the Treasury Department announced it is willing to convert up to $25 billion of its preferred holdings in Citigroup into riskier common stock. That conversion is contingent upon other preferred stock investors also converting. Citigroup said it will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public; in total, existing shareholders' stake could be cut to 26% of the company's stock.
Preferred shareholders like pension funds, sovereign wealth funds, and even big individual investors like former Citi Chairman Sanford Weill, do have a choice. Should investors choose not to convert their preferred shares to common stock, they are left to hope and pray that Citi will someday return to paying preferred dividends. (One type of preferred shares, so-called trust preferreds, will continue to pay dividends, and various classes of TruPs were trading between 20% and 66% higher in recent Friday trading, according to FactSet Research.)
Analysts say few investors are expected to hold on to their preferred shares. And, that has caused shareholders - both common and higher classes - to become much more wary about the banks that they have holdings in.
"The cost of doing this with one bank is that it makes shareholders at other banks nervous," said Campbell Harvey, professor of finance at Duke University's Fuqua School of Business.
Joseph Battipaglia, head equity strategist for the private-client group at Stifel Nicolaus, believes investors will shy away from investing in banks....