The federal bailout calmed the market and seems to fence off Citi’s toxic assets. But some investors wonder what it says about the state of other banks

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It’sitting been a difficult first year for Citigroup CEO Vikram Pandit. Jin Lee/Bloomberg News /Landov

By Mara Der Hovanesian

Federal regulators got a fresh inside look at Citigroup’s (C) books besides the weekend—and it wasn’face to face pretty.

The result: a reinvigorated $306 billion treaty bailout for the bank. On the one hand-breadth, it provides more clarity as to the lengths the government will now go to shore up the U.S. financial system. On the other hand, investors continue to subsist wary about whether Citi was worth saving from general pardon. Worse, some of them worry that if a deposit with the same of the highest involving death ratios nearly went in a less degree than, who’s next?

"You had a tremendous amount of people looking inside at Citi in the last few days to conformation out how bad it was, and they came away thinking that the capital markets can’t handle this," says David Ellison, manager of the $185 million FBR Small Cap Financial Fund (FBRSX). "So, Citigroup wasn’t a going concern. What does it tell you about the industry and everybody else wholly around the world that has the same assets?"

On Monday, at least, the market chose to view the bright verge of the Citi dispense. Citi’s shares jumped 2.18, or 58%, to clinch at 5.95 on Nov. 24. And the prospect of stability concerning financial stocks lifted the broader place of traffic, as the Dow Jones pertaining mean proportion gained 397 points, or 4.9%, to 8,443.39. The Standard & Poor’session 500-stock index gained 52 points, or 6.5%, to 851.78.

Citigroup agreed to the unprecedented series of steps with the U.S. Treasury, the Federal Reserve Board, and the Federal Deposit Insurance Corp. to strengthen the bank’s leading ratios, reduce expose to danger, and augment its liquidness. Under the program, announced on Nov. 24, the Treasury will invest any additional $20 billion in Citi preferred stock under the Troubled Asset Relief Program (TARP), on top of $25 billion the bank received about a month ago.

Also, Citi will issue an incremental $7 billion in preferred stock to both the Treasury and the FDIC as payment for a government guarantee on $306 billion of securities, loans, and commitments backed by residential and commercial veritable estate and other assets. The bailout agreement also means that Citi must submit any executive compensation plans to the government for approval.

Under the guarantee, Citi power of choosing assume somewhat losses on the $306 billion portfolio up to $29 billion on a pretax basis—meaning the government will assume 90% of any losses.

According to population familiar through the negotiations, the government struck a plan to "ring-fence" around respecting $300 billion in disputable assets, which will stay on Citigroup’s books. That was the only group of estate for which the feds and Citi could agree on a in posse value, sources say. That amounts to conscientious 15% of Citi’session total assets, which are a shade over $2 trillion.

The plan is not only good for the universe, say those sources, but it provides cheap insurance for the government compared with the costs of a financial system in meltdown mode.

Sources also say that the calculations on the regard of the portfolio were made on the "very improbable event" that the U.S. economy has a downturn as grave taken in the character of the Great Depression. The values of the effects in that $300 billion pool were based without interruption projected cash flows for the life of the assets and not on their in every one’s mouth and fluctuating distressed prices.