Stocks Surge as Fed Offers A Boost

The Dow Jones industrial average shot up 417 points yesterday after the Fed announced plans to help major Wall Street investment banks. (Mario Tama -- Getty Images)

The action was the second by the Fed in five days to try to get markets for mortgage-backed securities and other generally safe debt products functioning again. On Friday, the Fed said it would inject an additional $200 billion into the banking system through a different form of auction, known as a term auction facility. Those measures were also meant to help liquidity return to troubled world credit markets, but they were targeted at commercial banks, not investment banks.

The Fed had been preparing the move for weeks, taking action only after the markets continued to worsen in recent days.

"The mortgage market has just been locked up," said Craig Elder, fixed-income senior analyst at Robert W. Baird & Co. "I'm not sure if it solves all of the problems, but I think it should free up a considerable amount of liquidity."

While welcoming the Fed move, analysts were guarded in their enthusiasm. Since the credit crunch began roiling global markets last summer, the central bank has carried out a series of steps that temporarily calmed markets only to see investor confidence plunge again as new problems emerged.

"It's one step in the right direction in promoting liquidity, yet there certainly are some hurdles over the near term," said Joe DiCenso, fixed-income strategist at Lehman Brothers.

One of those hurdles may come next week, when first-quarter earnings start to be released by Wall Street firms. Goldman Sachs and Lehman Brothers report next Tuesday, followed by Bear Stearns on Thursday.

Analysts are projecting additional losses on top of the multibillion-dollar write-downs already suffered by financial institutions. But if the losses are substantially more than investors anticipate, panic could return to the credit market, analysts said.

"We think that this improvement hopefully will endure, but we probably have to get through next week and to the end of March for more confirmation of that," DiCenso said.

In announcing the program, the Fed also extended agreements with central banks in Switzerland and the European Union that allow them to borrow billions of more dollars from the Fed and inject this money into their financial systems.

The Fed resisted calls by some on Wall Street for it to simply buy up mortgage-backed securities to help that market gain its footing again. That's because the central bank does not want to be in a position of propping up prices for any given asset, staff members said, but rather is focused on making markets function smoothly.

Irwin reported from Washington.