Citigroup shares tumbled 96 cents, or 39%, to $1.50 in 4 p.m

Citigroup shares tumbled 96 cents, or 39%, to $1.50 in 4 p.m. New York Stock Exchange trading Friday, reflecting that current holders of the bank's common stock will hold as little as 26% when the deal is completed.

Some investors were especially rattled by news that Citigroup will stop paying dividends on most of the bank's preferred shares. At many banks, preferred shares have been a haven from the epidemic of dividend cuts and eliminations on common stock. "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 in Durham, N.C.

Instead, financial institutions that need to bolster their balance sheets following regulatory "stress tests" now under way at the 19 largest U.S. banks can get new convertible preferred shares from the government or convert existing shares under terms announced by the Treasury Department this past week. The conditions include converting preferred shares to common equity at a 10% discount to the prevailing price as of Feb. 9.

Wall Street also is worried about "whether the company will be run in the interest of private shareholders or for the public good," said John McDonald, a banking analyst at Sanford Bernstein & Co. "It's a valid question what the priorities will look like."

Messrs. Geithner and Pandit began discussing details of the stock-conversion plan last Sunday evening, according to people familiar with the situation. Agreement on a basic framework was reached relatively quickly, but Citigroup and officials from the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Treasury then haggled over issues such as what would happen to $20 billion of taxpayer-owned preferred shares not included in the deal.
At times, Citigroup executives grew frustrated by what they viewed as slow responses from Washington. Asked Friday about the back-and-forth of the negotiations, one Citigroup executive responded: "There isn't one. We just wait." Some executives worried that private investors needed to go along with the deal might get cold feet if an agreement wasn't reached quickly.

On Friday, Citigroup said that most of the private institutions that hold a combined $12.5 billion in Citigroup preferred shares have agreed to convert their shares to common stock at $3.25 apiece. Among them are Singapore's sovereign-wealth fund and Prince Alwaleed bin Talal of Saudi Arabia. The New Jersey pension system, which bought Citigroup preferred shares in January 2008, is "still reviewing" the agreement, a spokesman said