Citi Bailout Gives Investors Reason to Smile

Shares of Citigroup (C Quote) and other large bank holding companies bounced on Monday, as investors cheered a fresh bailout that did not wipe out holders of preferred and common stock.

Citigroup common were shares up 49.1% to $5.62 in recent trading, recouping a chunk of the stock's steep fall last week when it slid 60% to $3.77. Investors had headed into the weekend worried that another government bailout wiping out common or preferred shareholders -- like earlier rescues for Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote) -- was on its way.

Instead, the Citigroup bailout jointly announced by the Treasury, Federal Reserve and Federal Deposit Insurance Corp. on Monday kept the banking giant's equity securities issues intact while bolstering capital with another $20 billion investment from the Treasury's Troubled Asset Relief Program. It also guarantees $306 billion in loans and securities on Citigroup's balance sheet. The icing on the cake was the announcement that the Fed was prepared "to backstop residual risk in the asset pool through a non-recourse loan."

The $20 billion in new preferred shares Citi will sell the government will pay an 8% dividend. That's an increase from the 5% dividend preferred shares sold to the government by Citi, JPMorgan Chase (JPM Quote), Bank of America (BAC Quote) and Wells Fargo (WFC Quote), each of which received $25 billion investments through the TARP in the first round of preferred equity investments last month. In all, 77 other financial service companies received such government investments, according to the Wall Street Journal's last count on Nov. 20.

Roller Coaster Ride for Preferred Investors