Wall St rallies on crisis solution hopes

Responding to the week’s gut-wrenching upheaval of the financial system, US Treasury Secretary Henry Paulson has been shopping around a proposal to congressional lawmakers that would create an entity to deal with the billions of dollars of bad debt still clogging the financial system, a congressional aide said.

The idea has been compared to the Resolution Trust Corp formed in 1989 to fix the savings and loan industry collapse. An index of beaten-down S&P financial stocks soared 11.7% while economic bellwethers such as General Electric and Caterpillar also posted sharp gains.

The rally came on the back of steep declines after a frantic four days in which American International Group was bailed out, Lehman Brothers went bankrupt and Merrill Lynch was forced into a shotgun marriage with Bank of America.

The Dow Jones industrial average jumped 410.03 points, or 3.86%, to 11,019.69, while the Standard & Poor’s 500 Index climbed 50.12 points, or 4.33%, to 1,206.51. The Nasdaq Composite Index shot up 100.25 points, or 4.78%, to 2,199.10.

For all three indexes, it was the biggest one-day percentage gain since October 2002 -- when the last bull market was born. Also helping the market were a flurry of headlines that seemed to point to a concerted global effort to clamp down on short sellers, who place bets that stocks will fall. The latest developments came on the first day that the US Securities and Exchange Commission’s new rules aimed against abusive short selling of stock in all publicly traded companies took effect.

Britain’s Financial Services Authority said investors will be temporarily barred from taking new short positions in financial stocks from midnight on Thursday, September 18, which analysts said raised the possibility of a similar action in the United States.

New York has started a wide-ranging probe into possible illegal short-selling in the stocks of Wall Street firms such as Goldman Sachs Group Inc and Morgan Stanley, Attorney General Andrew Cuomo said. And New York state’s pension funds temporarily stopped lending stocks in 19 banks and brokerage companies to short sellers, the state comptroller said, saying he wanted to starve “this speculative fire.” However, there were some notable exceptions to the late-day financial stock rally, including Goldman Sachs and State Street Corp. Goldman Sachs’ stock slipped 5.7% to $108.00, while State Street lost 8.9% to $59.00.

The market had started the day higher, after the world’s top central banks turned the funding taps on full blast. The Fed increased currency swap lines with other central banks by $180 billion to help them meet demand for US dollars in their markets and ease extreme funding strains in the global banking system. But the bulk of the session was volatile, reflecting uncertainty about the health of the financial system.

Composite New York Stock Exchange volume was at a record of over 10 billion shares. On the NYSE about 2.5 billion shares changing hands, trouncing last year’s estimated daily average of roughly 1.9 billion, while on Nasdaq, about 3.85 billion shares traded, also well above last year’s daily average of 2.17 billion. Advancing stocks outnumbered declining ones by 3 to 1 on the NYSE and the Nasdaq. (Reuters)