Citigroup does the right thing for investors stranded in auction-rate debt, but where’s the rest of Wall Street?

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Finally -- a bailout for small investors.

Citigroup Inc. today agreed to do the right thing by unfreezing $7.3 billion of its customers’ funds that are tied up in so-called auction-rate securities.

Now, will the rest of Wall Street follow suit?

The financial services industry has been the beneficiary of massive government help this year. If only some of that would have trickled down to the industry’s customers.

Brokerages turned their backs on clients after the auction-rate debt market seized-up in February, stranding investors in more than $300 billion of securities that had been marketed as being highly liquid -- meaning you were supposed to be able to get your cash back on demand.

But that liquidity hinged on whether other investors would be willing to buy if you wanted to sell. When the credit crunch worsened and bids dried up for any security that looked too complicated, the auction-rate market froze solid.

Investors in the securities still were earning interest but they couldn’t get their principal -- say, to make a college tuition payment, or pay a hospital bill.

It would have been the right thing for brokerages at that point to step up and offer to buy the securities back from any investor who wanted to sell.

That didn’t happen. No way was the industry, on its own, going to offer to bail out customers despite the high likelihood that those clients had been misinformed -- by their brokers -- about the relative safety of auction-rate debt.

Let’s review some of the high-profile bailouts that did happen this year:

-- The Federal Reserve saved the brokerage industry from a potential meltdown in March by arranging the marriage of failing Bear Stearns Cos. with JPMorgan Chase & Co.

-- As part of that rescue, the Fed opened its borrowing window to securities firms for the first time.

-- Last month, Congress agreed to allow the Treasury Department to pump taxpayers’ dollars into struggling mortgage giants Fannie Mae and Freddie Mac if the firms are threatened by insolvency.

For stranded auction-rate debt investors, however, little help was forthcoming from Wall Street. Only now that Citi has been bludgeoned by New York Atty. Gen. Andrew Cuomo, other state securities regulators and the Securities and Exchange Commission has the firm agreed to put up its own money to make its small investors in the auction-rate market whole.

The North American Securities Administrators Assn. says it is investigating or negotiating with 11 other brokerages that have customers trapped in the debt. Two firms -- UBS and Merrill Lynch & Co -- are facing state securities-fraud charges related to their sales of the debt. They have denied wrongdoing. UPDATE: Merrill late Thursday agreed to a buy-back plan for the securities. Go here.

Harry Newton, an online investment newsletter writer who has been keeping close tabs on the auction-rate debacle (look here), estimates that $200 billion still is locked up in the securities.

The Fed rushed money to Wall Street. The Treasury stands ready to rush money to Fannie Mae and Freddie Mac.

What good excuse does the brokerage industry have for failing to rush to help its own clients?