Stocks Jump on Reports of Plan for Bad Bank Assets

By TIM PARADIS
|  Friday, Jan 30, 2009  |  Updated 10:40 AM EDT
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Stocks Jump on Reports of Plan for Bad Bank Assets

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The rise in financial stocks is giving the overall market a lift.

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The optimism is building on Wall Street.

Financial stocks led Wall Street sharply higher Wednesday on investor hopes the Obama administration will create banks to absorb the bad assets weighing down the financial system.

The Standard & Poor's 500 index, a benchmark for the overall stock market, completed its first four-day rally since late November. The Dow Jones industrial average jumped 201 points.

Financial stocks surged on the notion that the government could take soured debt like defaulting mortgages off the hands of banks and place them in a so-called bad bank to hold toxic assets. Investors have been worrying that banks won't be able to resume more normal levels of lending without somehow dumping or walling off the bad debt that is corroding their balance sheets. And the economy can't recover from a 14-month-old recession without improvements in lending and consumer confidence.

Robert B. MacIntosh, chief economist at Eaton Vance Investment Management in Boston, said many questions remain about how a plan would work to take up bad assets. He added, though, that financial stocks have been so beaten down a rally isn't a surprise.

"The financials are just begging for good news here," he said.

Bank shares jumped: Wells Fargo & Co. surged 31 percent, Citigroup Inc. jumped 19 percent and Bank of America added 13 percent.

Investors showed little reaction to an afternoon statement from the Federal Reserve on the economy that contained little news. The central bank left interest rates near zero percent after its two-day meeting. Policymakers predict a gradual recovery in the economy will begin later this year but they caution that significant risks remain.

"I don't think there is anything terribly surprising here. I think the surprise, or the good news of the day, was the bad bank proposal," said Jerry Webman, chief economist at Oppenheimer Funds Inc. in New York.

Investors were also more upbeat ahead of a House vote on an $819 billion stimulus plan that contains a mix of new spending and tax cuts. Wall Street is hopeful the stimulus and other measures will help free the economy from its worst recession in decades.

Bill Dwyer, chief investment officer at MTB Investment Advisors in Baltimore, said any steps Washington can take to revive the economy could help the market. He said the plan to help neutralize bad bank assets could speed a recovery.

"We aren't really going to see any great economic news anytime soon so if there is any positive movement in Washington toward the problem, that would stabilize the decline," he said.

According to preliminary calculations, the Dow industrials rose 200.72, or 2.46 percent, to 8,375.45.

Broader stock indicators also rose. The S&P 500 index jumped 28.38, or 3.36 percent, to 874.09. The index last recorded as many straight advances in a five-day run that ended Nov. 28.

The Nasdaq composite index rose 53.44, or 3.55 percent, to 1,558.34.

The Russell 2000 index of smaller companies rose 17.44, or 3.83 percent, to 473.02.

The number of stocks rising outpaced those that fell by more than 6 to 1 on the New York Stock Exchange, where volume came to a light 1.55 billion shares compared with 1.17 billion shares traded Tuesday.

Bond prices tumbled as stocks gained. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.65 percent from 2.53 percent late Tuesday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.18 percent from 0.13 percent Tuesday.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude rose 58 cents to settle at $42.16 a barrel on the New York Mercantile Exchange.

The advance in financial stocks gave support to the overall market. CNBC reported Tuesday that the Obama administration is considering a plan to buy bad assets.

Wells Fargo jumped $5, or 31 percent, to $21.19 after the company said it would maintain its dividend. The company reported results that included write-downs to reduce is exposure to the risky assets of Wachovia Corp. Wells Fargo also added to its reserves for future losses. The company acquired Wachovia on Dec. 31.

Other banks charged higher on the notion that Washington could vacuum up some of their bad debt. Citigroup Inc. rose 66 cents, or 19 percent, to $4.21, while Bank of America Corp. rose 89 cents, or 14 percent, to $7.39. State Street Corp. surged $6.15, or 31 percent, to $25.77.

Some analysts attributed the run-up in banks partly to investors buying up those stocks to cover bets they made. Investors who sell a stock "short" are betting a stock would fall. They are forced to step in and buy the stock if it appears they were wrong and could lose money. This buying, in turn, can drive stocks higher.

Investor sentiment has been buoyed this week by somewhat improved corporate results. After weeks dominated by terrible results from the banking industry, investors have welcomed news that some companies were still able to gather profits in the final three months of 2008 despite the weak economy. Companies from United States Steel Corp. to American Express Co. turned in earnings that helped lift stocks moderately Tuesday.

Overseas, Britain's FTSE 100 rose 2.40 percent, Germany's DAX index jumped 4.52 percent, and France's CAC-40 rose 4.11 percent. Japan's Nikkei stock average rose 0.56 percent.

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