Bailout buoys Citigroup

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It took an open-ended government bailout that could cost taxpayers billions of dollars, but Citigroup’s share price finally rebounded this morning.

The stock rose almost 60% in early trading following the federal government’s agreement late Sunday night to backstop more than $300 billion in the company’s bad debt. Regulators also agreed to pump in another $20 billion of capital on top of an earlier $25-billion infusion.

As of 8:45 a.m. PST, the shares were up $2.24 to $6.01.

The government rescue became necessary after a 60% plunge in the share price last week threw the company into jeopardy.

The stock rally and initial reaction from analysts indicate that the rescue plan has mounted its first hurdle, which was to raise confidence in Citigroup’s ability to conduct normal business and withstand billions in expected losses from the faltering economy.

The deal gives Citigroup ‘ample breathing room’ to stabilize itself, David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote to clients this morning.

‘We believe this deal will reduce the probability of a depositor or counterparty revolt,’ Trone wrote.

The bailout set off a broad market rally, with the Dow Jones industrial average up more than 300 points. Financial stocks are in the midst of their best rally in a month.

Under the plan, Citigroup would absorb the first $29 billion in losses on a pool of $306 billion in troubled assets. After that, the government –- that is, taxpayers –- would shoulder 90% of any additional write-downs with Citigroup responsible for the other 10%.

The question is whether jittery investors believe that this marks a turning point for battered banking companies.

Past iterations of the government’s financial-sector salvage operation have been greeted with an initial burst of euphoria that gave way quickly.

Part of today’s rally is no doubt due to so-called short covering as investors who had bet against Citigroup’s stock unwind their bets by buying shares. That won’t sustain stock prices for long.

Investor relief could fade quickly if short sellers target other companies or if the government is forced to fashion similar bailouts for others.

The bottom line is that this is likely no more than one more step in a long process.

-- Walter Hamilton