WASHINGTON, USA - A WEEKEND rescue averted a potentially calamitous collapse at banking giant Citigroup, prompting relief on Wall Street but scepticism on the US government's ability to stay ahead of the credit crisis.

The rescue announcement came shortly before midnight on Sunday, after federal officials reached an agreement with the financial giant hit with a swooning stock price and staggering losses.

The Treasury Department will invest US$20 billion (S$30 billion) in Citigroup, giving US taxpayers an eight per cent stake in the company. Additionally, the government will provide a guarantee on losses of some US$306 billion of troubled mortgage securities and related assets.

Citigroup will issue US$7 billion in preferred stock to the US Treasury and the FDIC as payment for the US$306 billion guarantee.

The guarantee calls for Citi to assume any losses on the portfolio up to US$29 billion and for the government to assume 90 per cent of any losses above that level.

Shares in Citi, which had been pummeled in recent weeks to historic lows, surged 57.8 per cent to close at US$5.95 on the news, sparking rallies on Wall Street and other markets.

Mr Brian Bethune, economist at IHS Global Insight, said the plan 'breaks new territory in terms of further scaling up the case-by-case approach recently taken by the government in dealing with severe stresses on the financial system'. Mr Bethune said the plan may help steady the financial system but breaks new ground.

'Perhaps the ultimate reality check is that the US government could have purchased Citigroup outright for about US$25 billion at the end of last week, which is far less that the US$45 billion in capital that the Treasury has pumped in to the capital base of the institution,' he said.

Even though the rescue dilutes the existing shares, it helps ensure the survival of the banking giant, positive news for investors.

'The failure of Citi, with its US$2 trillion balance sheet, would have been absolutely catastrophic to the global banking system,' said Mr Fred Dickson at DA Davidson & Co.

'The government is making sure Citi doesn't fail. The price to Citi's shareholders is high although they escape the onerous terms given to shareholders of (mortgages finance firms) Fannie Mae and Freddie Mac, which saw their companies essentially taken over by the government and their stock prices collapse.'

Other analysts said the plan set a dangerous precedent and may not be enough to steady the troubled banking system.

'This deal could saddle the government with US$277 billion worth of losses - that's because Citi can 'cover' its 10 per cent share with toxic waste - in effect adding to the government's losses,' said Mr Peter Cohan, a management consultant and professor at Babson College.

'So much for capitalism without failure,' said Mr Barry Ritzholtz of the research firm FusionIQ.

'Where is the 'protection' for the taxpayers? Where are the clawbacks? How about going after the idiots that bought a third of a trillion dollars worth of junk, and then got paid large on it? Where is the sense of outrage and justice?' Mr Yves Smith, analyst at the financial website Naked Capitalism, said the effort 'cannot achieve its stated aim'.

'The Fed inceasingly has been trying to stand in for private lenders, but it cannot take on the entire private sector,' he said. 'Trying to prop up bad loans in place merely ties up valuable lending capacity, throwing good money after bad.'

Some said the rescue was the only to prevent a further loss of confidence in the global financial system.

'The decision came after Citigroup's crashing stock price sparked concerns of a run on a bank with US$2 trillion in assets and operations in over 100 countries,' said Ms Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.

'Citigroup's existing shareholders will be diluted in the near term, but over the longer term, the stock could be supported by the removal of the troubled assets ... The deal could become a template for other large banks facing burgeoning losses.'