Citigroup Shares Plunged: What You Need to Know

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 thisarticle 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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