Citigroup said before the opening bell that it agreed to a deal in which the U.S. government and private investors including the government of Singapore and Saudi Arabian Prince Alwaleed Bin Talal will convert their preferred stock in the struggling bank to common shares. The plan won't require additional money from the U.S. government, which holds an 8% stake in Citigroup and would own 36%.
"Citi has been a leading indicator the whole way down and the dilution that shareholders took today is sort of a leading indicator of what could happen to other banks, particularly the weak ones," said Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund in Purchase, N.Y.
Some sort of deal with the government had been expected much of the week. But Citi fell 96 cents, or 39%, to $1.50 as investors worried about how much their holdings in the company would be diluted by the changes.
GE, meanwhile, said late in the session it would cut its dividend to save $9 billion a year. The conglomerate has a big financing arm, so it often trades like a bank stock. Its shares fell 59 cents, or 6.5%, to $8.51.
Wall Street was also shaken when the government's gross domestic product report showed that the economy fell at a 6.2% annual pace at the end of last year, a much faster than expected pace.
The Commerce Department figures on GDP, the worst since an annualized drop of 6.4% in the first three months of 1982, cast some doubt that the economy will begin to show signs of improvement by the end of this year, as many analysts have predicted. But the poor showing also could make it that much easier for readings in coming quarters to look by comparison, Cook said. Investors would welcome even a slowing pace of decline.
Health care stocks, normally an area of safety in weak economies, fell for a second straight day Friday after the White House released a budget proposal Thursday that calls for cutting some health care spending.
"This creates a lot of weakness in this market because if the safe-havens are not safe anymore it could convince a lot of people to say 'You know, I don't kneed to be in this market right now. I can just go to cash,"' Shacknofsky said.
Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.02% from 3% late Thursday. The yield on the three-month T-bill, considered one of the safest investments, was down at 0.25, compared with 0.26% from Thursday.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude fell 46 cents to settle at $44.76 a barrel on the New York Mercantile Exchange.
Britain's FTSE 100 tumbled 2.2%, Germany's DAX index fell 2.5%, and France's CAC-40 fell 1.5%. Earlier, Japan's Nikkei stock average rose 1.5%.