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Shares of


(C) - Get Citigroup Inc. Report

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) and

Freddie Mac

( FRE) -- was on its way.

Instead, the


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

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(JPM) - Get JP Morgan Chase & Co. Report


Bank of America

(BAC) - Get Bank of America Corporation Report


Wells Fargo

(WFC) - Get Wells Fargo & Company Report

, 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

When the Treasury placed Fannie and Freddie into conservatorship in September, the common stock was decimated and preferred stock was wiped out since all dividends were suspended. This was an outcome few expected at the time, and it hit scores of already-stressed banks and thrifts -- many of which had significant investments in the

preferred shares

-- hard at the time.

Many investors who turned to preferred stock and trust-preferred securities for income over the past several years, as bond yields declined, have paid for that decision. Many of these securities, with coupons based on a $25 par value when issued, dropped 50% or more.

While most preferred issues continued to pay dividends, investors have been faced with difficult choices. They can stay put and hope the dividend income continues to flow and that prices eventually recover, or sell, take a huge loss and then face the impossible task of replacing the income in a safer way.

After the Citigroup bailout, shares of preferred issue Citigroup Capital XX, which has a 7.875% coupon, were up 40% to $14.00 in late morning trading. Even after that increase, the annual dividend yield to a new investor would be 14%.

Not surprisingly, the relief spread to other holding company preferred issues which had been pushed down by investors fearing another Fannie/Freddie type wipe-out.

Bank of America Series H shares, which have an 8.20% coupon, were up 11% in late morning trading to $19.47. While a less spectacular rise than the Citigroup preferred issues, these shares yield 10.53% at this price.

For another extreme example involving considerably more risk,

Royal Bank of Scotland

(RBS) - Get Royal Bank of Scotland Group Plc Report

(which has fed at the British government's capital trough more than once) preferred Series T 7.25% American Depositary receipts, were trading at $8.22 late this morning, up 28.44%, and yielding 22%.

Clearly, the market continues to bake a lot of perceived risk into preferred share prices, so buyer beware.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.