Vision Credit Education, Inc.

The $21 billion in losses that Citigroup had so far reported threatened to undermine the stability of the financial giant. Now the Fed is injecting an additional $20 billion into the bank for which preferred shares will be issued. This comes on the heels of an earlier $25 billion stake in the firm.

Citigroup stock has been hammered in the past 2 years as investor became increasingly worried about the exposure to troubled mortgage-backed assets. Analysts had warned that many of these assets would drop in value as housing defaults increased. Indeed, the number of foreclosures has been especially worrisome for CItigroup and other large financial companies.

What this investment does is much more substantial than just a cash infusion. THe governemnt is also providing protection from future losses, of which Citigroup would only be liable for 10%. Citi would have to eat the first $29 billion of losses.

Investors became increasingly alarmed when Citigroup failed to gain Wachovia’s deposit base as it had previously announced. Instead, Wells Fargo submitted a competing plan that was ultimately favored by Wachovia.

Investor sentiment was mostly positive and initially lead to an immediate increase in shares on European markets. US futures were also up, signaling a possible boost to the stock price. The stock had dropped 87% for the year on news of growing loan losses.

For homeowners with mortgages held by Citigroup, this is good news. Some strings were attached to this agreement. One major requirement was that Citigroup will have to work with delinquent borrowers, which will include loan modifications. CItigroup is required to do more to help distressed homeowners avoid foreclosure.

Citigroup is also prohibited from issuing more than a 1% dividend over the next 3 years. The governent however will receive an 8% dividend for its investment.

This move should restore some confidence among investors while helping Citigroup stop the bleeding from mortgage loan losses. Whether the actions will be enough remain to be seen. At a minimum though, it appears that the government has made a decision to allow Citigroup to remain viable, which is unlike the fate of other financial institutions that were allowed to fail.