Citigroup exit from Dow cements bank's downfall

Citigroup Inc's run of ignominy has now come to this: losing its coveted spot in the Dow Jones industrial average <.DJI> to a former unit.

Dow Jones Indexes on Monday said the property and casualty insurer Travelers Cos will replace Citigroup in its flagship 30-stock index of blue-chip stocks, effective June 8.

Citigroup shares have traded below $5 since mid-January, and bottomed at 97 cents on March 5, after huge losses led to a series of federal bailouts. Taxpayers could end up owning 34 percent of what was once the world's largest bank by market value.

The change to the Dow ends 12 years in the index for New York-based Citigroup, known as Citicorp when it joined. It also marks the return to the index of Travelers' red umbrella logo, which Citigroup sold to Travelers in 2007, five years after spinning off the St. Paul, Minnesota-based company.

You're taking out a weak, wounded financial stock, said Richard Sylla, a professor at New York University's Stern School of Business. They probably never thought the biggest bank in the world would become a wounded duck.

Citigroup was created in 1998 when Sanford Sandy Weill merged his Travelers Group with Citicorp, creating what was deemed a financial supermarket.

The current chief executive, Vikram Pandit, is dismantling that model, selling businesses and debt to bolster capital.

We were reluctant to remove Citigroup at the height of the financial frenzy, Dow Jones Editor-in-Chief Robert Thomson said in a statement. We genuinely hope that once the bank has refashioned itself that we will again be able to consider it for inclusion (in the Dow).

Citigroup said the change will not affect its strategy or efforts to return to sustained profitability. Travelers and Weill did not immediately return requests seeking a comment.

On Monday, Citigroup began a brokerage joint venture with Morgan Stanley , transferring its Smith Barney unit for a 49 percent stake in the venture and $2.75 billion in cash.

TWO BANKS LEFT

The removal of Citigroup from the Dow leaves just two traditional banks in the index: Bank of America Corp and JPMorgan Chase & Co .

Adding Travelers is intended to restore the financials industry to full representation in the Dow, Thomson said. In September, insurer American International Group Inc left the Dow and was replaced by Kraft Foods Inc .

Two other Dow components have big financial services units: American Express Co and General Electric Co . The Dow average was created in 1896.

Financial services is becoming more of an umbrella category and doesn't reflect only banking, said Charles Geisst, author of Wall Street: A History and a finance professor at Manhattan College. If Citigroup stock were still above $10 per share, we might not be having this discussion.

Cisco Systems Inc , the world's largest networking equipment maker, is also joining the Dow. It replaces General Motors Corp , which filed for bankruptcy protection on Monday.

When it spun off Travelers, Citigroup was eyeing what Weill called important opportunities to invest our capital really on a global basis, in much more high-growth businesses.

It sold the umbrella logo after finding that customers still associated it with insurance. Travelers first used the umbrella in 1870.

Citigroup was one of 19 banks to undergo federal stress tests of their ability to handle a deep recession.

Regulators found it needed $92.6 billion more common equity as of year-end, more than any other bank. They ordered the bank to raise $5.5 billion, after crediting it for some asset sales and capital-raising, including from the government.

Citigroup shares fell 2 cents to $3.70 in afternoon trading on the New York Stock Exchange.

(Reporting by Jonathan Stempel; Additional reporting by Dan Wilchins; editing by John Wallace)