Banking Plan Propels Wall St. to Best Day in Months

Details of the government’s plans to clean up the nation’s banks ignited a blazing stock market rally on Monday, lifting Wall Street to its best one-day performance in five months and tempting some investors to imagine what they would not have dared just a few weeks ago — that the worst may finally be over.
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The Dow surged nearly 500 points, and the Standard & Poor’s 500-stock index rose more than 7 percent, in what amounted to a rare cheer from Wall Street for the Obamaadministration and Treasury Secretary Timothy F. Geithner.

“This is what the markets wanted,” said David Bianco, chief United States equity strategist at UBS.

In the last two weeks, glimmers of hope for a recovery in the financial industry have pushed the Dow up 19 percent and the S.& P. 500 up 21.5 percent from their bear market lows, the steepest such rally in stocks since 1938.

Just last month, major stock markets spiraled to a 12-year low after the administration delivered a rough outline of a public-private partnership to shore up the major banks — with little substance or detail.

But on Monday morning, as the Treasury Department filled in the blanks of a $500 billion to $1 trillion plan to buy up troubled assets, investors started buying early in Europe and did not stop until the closing bell rang on Wall Street. The Dow gained 497.48 points, or 6.84 percent, to close at 7,775.86, while the S.& P. 500 was up 54.38 points, to 822.92. The Nasdaq closed 6.8 percent higher, at 1,555.77.

The rally was cemented by signs of a possible uptick in the housing market. The National Association of Realtors said existing-home sales rose 5.1 percent in February as buyers scooped up foreclosed homes.

“The areas that fall the fastest are going to recover,” said Guy Cecala, publisher of Inside Mortgage Finance. “There’s going to be a floor established. Seven hundred thousand dollar houses are $250,000 — that’s what’s bringing people back into the markets.”

In New York, the S.& P. financial index surged 18 percent, propelling an updraft that lifted every sector of the stock market. Banks like Wells Fargo and Bank of America, which could participate in the program, each rose more than 20 percent. Citigroup, whose stock fell below $1 two weeks ago, closed at $3.13.

The government is betting its plan will loosen credit markets and restore normal lending conditions by allowing banks to deleverage billions of dollars in mortgage-related debt sitting on their balance sheets. The program would be financed using capital from private investors like hedge funds, and about $75 billion to $100 billion from the $700 billion financial bailout. The Federal Deposit Insurance Corporation — which guarantees the bank accounts of individuals — would provide most of the financing.

“This is the free-money rally,” said Barry Ritholtz, chief executive of Fusion IQ, an investment and research firm. “Traders like the fact that there’s a boatload of cash headed their way.”

The Financial Services Roundtable, a leading financial services lobby, threw its weight behind the Treasury’s plans on Monday morning, saying that the purchase program would keep the troubled assets from bogging down big banks and preventing a recovery in banking and the broader financial system.

Mark Mobius, the chairman of Templeton Asset Management, said in an interview with Bloomberg Television that a bull market rally was under way. Other analysts have declared that a punishing slide from Dow 14,000 had finally ended, and that the markets had found a floor.

“Have we bottomed out?” said James W. Paulsen, chief investment strategist at Wells Capital Management. “I think so.”

But others are being much more cautious. The global economy is shrinking fast, the United States is still losing 600,000 jobs every month, and the rally that lifted the S.& P. 500 24 percent from November to early January fell apart.

Analysts warn that the recent gains could collapse just as quickly if the administration’s asset purchase program hits a snag or housing deteriorates further.

Underscoring those weaknesses, bond investors are forcing financial companies to pay more to borrow money, expanding the difference between financial bond rates and Treasury rates to 8.5 percent.

The report showing a jump in sales of previously owned homes fed hopes that housing was finally scraping bottom, at least in the West and other parts of the country hit badly by the housing bust. Economists and real estate experts said the hardest hit parts of the country, like California, Nevada and Arizona, were starting to emerge from the worst of the housing crisis.

But economists said that, despite the increase, a wave of new foreclosures was likely to hit the housing market as people without jobs used up their savings and defaulted on their mortgages. Markets like New York or Washington, where prices have not tumbled so sharply, will probably face more stagnant sales and sliding prices in the months ahead.

“We’re in for a really difficult 2009,” said Lance Martin, a real estate broker in Southern California’s hard-hit Inland Empire — mainly Riverside and San Bernardino counties.

The Treasury’s 10-year note fell 6/32, to 100 27/32. The yield, which moves in the opposite direction from the price, rose to 2.65 percent, from 2.63 percent late Friday.