Wall St. U-Turn Pulls U.S. Stocks Out of Nosedive

The stock market soared yesterday afternoon, capping a remarkably volatile day, as new efforts by key players in the U.S. financial system aim to raise enough cash to guard against some of the fallout of the credit crisis.

The Dow Jones industrial average was down 326 points at lunchtime, then finished the day up 299 points, a 5.4 percent swing. For the day, the Dow rose 2.5 percent.

Analysts attributed the turnabout to news that regulators are persuading banks to plow money into bond insurance companies, a crucial and troubled part of the world financial infrastructure. Bank of America said it will raise $6 billion, which would help it continue lending even after massive losses from loans tied to mortgages.

Those pieces of news, combined with the aggressive Federal Reserve interest rate cut announced Tuesday, gave investors solace that U.S. financial institutions are starting to come to terms with the fallout from the slowing economy and credit crisis. Stocks of financial services companies rose a combined 9.2 percent Tuesday and Wednesday.

Analysts were pleased with the signs of stability in the financial sector but cautioned not to assume that the crisis has passed. "The financials have put together two good days," said Neil Hennessy, president of Hennessy Advisors. "But that's like the first two minutes of a basketball game -- you've still got 38 minutes left."

European financial markets, by contrast, continued to plummet, a reflection of contrasting approaches to dealing with the financial crisis and economic downturn on the two sides of the Atlantic. The German stock market was down 4.9 percent yesterday and is down 12 percent for the week.

The Federal Reserve cut interest rates sharply Tuesday to try to arrest a widening financial panic. The head of the European Central Bank took a different approach yesterday.

"Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility," bank President Jean-Claude Trichet told the European Parliament.

That signaled that central bankers in Europe will be strongly disinclined to cut interest rates unless the European economy slows significantly. In the short history of the European Central Bank, and the long history of the German Bundesbank, on which it was modeled, bankers have rarely followed the American tradition of taking aggressive action to try to calm financial markets.

"They don't have the philosophy we do in terms of activism," said Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics in the District. "That is an American way of doing things."

The lack of expected rate cuts from the European bank was not the only problem haunting European markets. Analysts there increasingly expect major European banks to report losses related to complex securities tied to American home mortgages. "German banks are just as involved in these problems as U.S. banks because it is a global financial system," Truman said. "In that sense, the problem is ahead of them."

Since European markets plummeted Monday, European leaders have been saying that their economies are strong and that the current problems are due to weakness in the United States.