Citigroup Shares Plunged: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Too-big-to-fail Citigroup (NYS: C) dropped 22% in intraday trading today after a lawsuit filed against competitor fueled fear that Citigroup is facing a rising risk that it will need to make good on fraudulent mortgage securities.

So what:American International Group (NYS: AIG) announced that it's suing Bank of America (NYS: BAC) for $10 billion on grounds that BofA (and its acquired Countrywide Financial unit) committed mortgage-securities fraud. The news came on the heels of last week's SEC filing by BofA that claims over bad mortgages are on the rise at government-sponsored entities such as Fannie Mae and Freddie Mac.

Now what: The cost of making good on fraudulent mortgages could be higher than expected for Citigroup and many other banks. That would further deplete already weak assets and earnings at a time when it's not clear how banks will make money for real. Fears that the economy is slowing exacerbated the sell-off. Citigroup's reverse split in early May seems have been an accurate signal to dump the stock, which has subsequently underperformed both the S&P 500 index and the SPDR Financial Select Sector ETF (NYS: XLF) .

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At the time this article was published Fool contributor Cindy Johnson owns no shares of any company named above. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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