Oct. 14 (Bloomberg) -- Citigroup Inc. and Goldman Sachs Group Inc. were among banks that soared in New York trading after the U.S. government said it would invest in nine of the country's biggest financial firms and guarantee debt they issue.

Shares of Morgan Stanley, Bank of America Corp., Merrill Lynch & Co. and Wells Fargo & Co. also climbed on the plan, in which the government will spend $125 billion to buy preferred stock in the companies.

``It's a good thing, it's what needs to happen, it will allow the markets to start functioning again,'' said Ralph Cole, a vice president for research at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which oversees $2.7 billion including shares in JPMorgan, Wells Fargo and Goldman. ``We'll know if it's working when we see if overnight rates go down and banks start lending to each other.''

Citigroup, JPMorgan, Bank of America and Wells Fargo will each receive $25 billion, according to people familiar with the matter, while Morgan Stanley and Goldman will get $10 billion. Bank of New York Mellon Corp. will receive about $3 billion and State Street Corp. will get about $2 billion, the companies said today.

The investments are part of a $250 billion plan to put capital into U.S. financial institutions, which have been burdened by bad loans and rising borrowing costs.

Golden Parachutes

Participating banks will need to accept limits on executive pay and so-called golden parachute payments. They also will need to give the Treasury warrants for an amount equal to 15 percent of the senior preferred investment, with a strike price determined by the bank's share price at the time of issuance.

Goldman and Morgan Stanley were raised to ``buy'' from ``hold'' today by Citigroup analyst Prashant Bhatia.

``Earnings power and fundamentals are front and center once again,'' Bhatia wrote in a note today. ``Based on our earnings estimates and solvency issues taking a back seat, the shares of Morgan Stanley and Goldman Sachs have significant upside.''

Other analysts were more cautious. David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, said that after the initial rally, share prices may ``stall out, as the reality of the global and domestic economic weakness sets in.''

The U.S. initiative followed an announcement that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.

Europeans Lead

``Unfortunately we have to follow the Europeans in putting together a stronger plan,'' said Peter Kovalski, a senior portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages $12 billion including shares of most of the companies involved in the plan. ``The worry I would have is that these banks forced to take capital, their returns will be hurt due to some policy decisions made in D.C.''

Shares of Citigroup, the biggest U.S. bank by assets, rose $2.87, or 18 percent, to $18.62 in New York Stock Exchange composite trading. Bank of America rose $3.74, or 16 percent, to $26.53. Wells Fargo jumped 10 percent to $33.52.

Goldman stock climbed $11.90, or 11 percent, to $122.90. Morgan Stanley rose 21 percent to $21.94.

``This is the most significant development to date in the sense that in one action the Treasury has moved to address the greater issues of the day facing banks -- capital, liquidity, in the form of depositor protection, and the ability to issue debt,'' Citigroup analyst Keith Horowitz wrote in a note today.

Citigroup upgraded 12 U.S. banks to ``buy,'' including Bank of America, which is viewed as the ``greatest gainer.''

Below is a list of the banks in which the Treasury plans to invest:

Citigroup $25 Billion

JPMorgan $25 Billion

Bank of America/Merrill $25 Billion

Wells Fargo $25 Billion

Goldman Sachs $10 Billion

Morgan Stanley $10 Billion

Bank of New York Mellon $3 Billion

State Street $2 Billion

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: October 14, 2008 17:11 EDT