Image: Wall Street
M. Spencer Green  /  AP
Richard Reilley, right, holds his head as he trades with Nicholas Cerone in the S&P 500 futures trading pit at the CME Group. 
updated 9/19/2008 8:54:04 AM ET 2008-09-19T12:54:04

Wall Street rallied in a stunning late-session turnaround Thursday, shooting higher and hurtling the Dow Jones industrials up 400 points following a report that the federal government might create an entity to absorb banks’ bad debt. The report also cooled investors’ fervor for safe investments like government debt that were in demand for much of the day.

The report that Treasury Secretary Henry Paulson is considering the formation of a vehicle like the Resolution Trust Corp. that was set up during the savings and loan crisis of the late 1980s and early 1990s left previously solemn investors ebullient. Wall Street hoped a huge federal intervention could help financial institutions jettison bad mortgage debt and stop the drain on capital that has already taken down companies including Bear Stearns Cos. and Lehman Brothers Holdings Inc.

Worries about financial landmines on companies’ books have essentially crippled parts of the world’s financial markets in recent days and led to the intense volatility in the markets this week.

“It’s going to take a lot of the bad debt off the balance sheets of these companies,” said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York, commenting on the possibilities of an entity akin to the RTC. It could alleviate many of the pressures causing the credit crisis, he said, and reopen moribund credit markets. But Fullman noted, “the devil’s in the details.”

“Bear markets are very sensitive to news. And on a scale of 1 to 10, this one is a 13,” he said of the report.

The report from CNBC gave direction to a market that had weaved in and out of positive territory for much of the session as investors shuttled between the safety of Treasury bills and gold and the bargains posed by stocks that have been pounded lower.

The Dow soared 410.03, or 3.86 percent, to 11,019.69, surging 560 points from its low of the day, 10,459.44. It was the Dow’s biggest percentage point gain since October 2002 but still leaves the index down about 400 for the week after routs Monday and Wednesday.

Broader stock indicators also jumped. The Standard & Poor’s 500 index rose 50.12, or 4.33 percent, to 1,206.51, and the Nasdaq composite index advanced 100.25, or 4.78 percent, to 2,199.10.

The report of a broader government bailout proved more reassuring to investors than moves before Wall Street’s opening bell Thursday by the Federal Reserve and other major central banks to inject as much as $180 billion into global money markets. The moves were an attempt to keep the credit crisis from worsening; the Fed added another $55 billion in overnight loans Thursday.

But it was only the prospect of a more comprehensive vehicle to sweep up bad debt that emboldened investors. Congress established the RTC in 1989 to buy $394 billion worth of real estate, mortgages and other assets of hundreds of failed savings-and-loan institutions. The corporation operated for several years disposing of the associations’ assets, and then went out of business.

A repository for soured mortgage debt could help alleviate the grinding of the gears in the world’s credit markets that have driven up the cost of borrowing for businesses; banks have become hesitant to make loans even to each other in recent days for fear of what institutions might be hobbled by soured debt. Investors are also contending with worries that more big-name financial companies could falter.

Major Market Indices

The Dow moved in and out of positive territory more than a dozen times, although there was little in the way of significant news to prompt the course changes. Investors who began the day feeling optimistic because of the money the Fed and other central banks added to the markets lost their resolve by late morning and gave back their gains.

But the CNBC report was the kind of catalyst for a comeback that has become rare on Wall Street in the past few months. When the market heard that there might be a fix for banks’ bad debt problems, the Dow began rocketing higher. Some investors were pleased by the news while others raced to cover bets that stocks would fall, traders said.

Fear in the markets had led to speculation about the future of such major players as thrift bank Washington Mutual Inc. and investment bank Morgan Stanley. Media reports have been saying that Wells Fargo & Co. and Citigroup Inc. are interested in a possible takeover of Washington Mutual; and a person familiar with the negotiations said Morgan Stanley and Wachovia Corp. are in talks about a possible combination. He spoke on condition of anonymity because the talks are ongoing.

“We’re seeing a tremendous amount of nervousness. That nervousness is leading to volatility,” said Anthony Conroy, head trader for BNY ConvergEx Group. He said the markets hadn’t seen as much fractiousness since the 1920s.

Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where consolidated volume came to an enormous 10.3 billion shares compared with 9.23 billion traded Wednesday. While volumes have been heavy all week, traders on Thursday were positioning themselves ahead of Friday’s expiration of options contracts that can exacerbate volatility.

Investors shying from the risks of stocks turned to government-backed debt. On Wednesday, the 3-month Treasury bill — considered one of the safest short-duration assets — saw demand surge so high that its yield briefly dipped into negative territory for the first time since 1940. Investors have been so focused on parking their money in safe assets that they have been willing to take very little return on such investments.

The prices for short-duration Treasurys fell from Wednesday’s levels. The yield on the 3-month T-bill was extremely low at 0.07 percent — up slightly from 0.02 percent late Wednesday but well below its yield of 1.60 percent just a week ago.

Longer-term bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 3.53 percent from 3.42 percent late Wednesday.

Investors also continued a move into other safe havens, though demand eased somewhat as stocks soared. Gold rose again Thursday, up $46.50 to $897 an ounce on the New York Mercantile Exchange after posting its largest ever one-day price jump Wednesday. But it backtracked in after-market trading, responding to the CNBC report.

Oil shot up early in the day, moving back above $100 as investors sought it as another haven. But crude fell back with the market’s realization that the financial turmoil will likely exacerbate the drop in demand that has taken oil down sharply from its July record of $147.27 a barrel.

Light, sweet crude on the Nymex rose 72 cents to settle at $97.88 a barrel.

Among financials, Morgan Stanley rose 80 cents, or 3.7 percent, to $22.55 as the investment bank sought a buyer or cash infusion to shore up its flagging share price. The stock has fallen sharply in the past week following Monday’s bankruptcy filing at rival Lehman Brothers and a forced sale of Merrill Lynch & Co. to Bank of America Corp.

The Russell 2000 index of smaller companies rose 47.30, or 6.99 percent, to 723.68.

Overseas, Japan’s Nikkei stock average dropped 2.22 percent to its lowest closing level in over three years. Hong Kong’s Hang Seng index lost 0.03 percent. Britain’s FTSE 100 fell 0.66 percent, Germany’s DAX index rose 0.04 percent, and France’s CAC-40 fell 1.06 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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