U.S. Stock Markets Soar on Financial Rescue Plan

Global stocks have experienced wild fluctuations this week in the wake of the U.S. government's seizure of insurance giant American International Group, the failure of Lehman Brothers, the disappearance of Merrill Lynch as an independent company and reports the U.S. government will set up a government entity to take on bad debts from financial institutions.
By Renae Merle
Washington Post Staff Writer
Friday, September 19, 2008; 5:29 PM

Wall Street's tumultuous week, which included the disappearance of two major investment firms and the rescue of the nation's largest insurer, culminated with nearly a 400-point rally today as the government laid out a financial rescue plan that could cost hundreds of billions of dollars.

The Dow Jones industrial average, which jumped between massive losses and gains this week, closed up today 369 points, or 3.4 percent, at 11,388.44. That is on top of a 410-point gain late yesterday after news of a government rescue effort emerged and brings the market near break-even for the week -- sweeping away Monday's 500-point loss.

The technology-heavy Nasdaq gained 75 points today, up 3.4 percent, closing at 2,273.90. The Standard & Poor's 500-stock index rose 49 points, or 4 percent, to close at 1,255.08. After taking massive losses earlier in the week, the Nasdaq and S&P ended in positive territory overall.

Global markets also closed up on the news. European markets rose on the order of 5 7 to 9 percent, while Asian markets overnight added anywhere from 4 to 9 percent.

"It's the craziest week I have ever seen and I have been doing this since 1983," said Art Hogan, chief market analyst at Jefferies & Co. "We have some households names that don't exist anymore -- Lehman, AIG -- in real terms Fannie and Freddie no longer exist as we knew them." The government seized control of mortgage giants Fannie Mae and Freddie Mac two weeks ago.

Judging by today's Dow close, "you wouldn't know that Lehman was decimated this week," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC. "You wouldn't know that there were emergency meetings trying to rescue what will be left of Wall Street."

After watching the credit market grind to a near standstill, the government said today it would lift the financial sector by taking on the bad debts of troubled banks, propping up money-market mutual funds and temporarily banning short selling of financial stocks.

"It's a massive relief rally on the back of the comprehensive plan," said Joseph Brusuelas, chief economist for Merk Investment. "If you have hundreds of millions of mortgage-backed securities on your books that you cannot value -- much less sell -- you can now unload them to the U.S. government."

The government's actions cap a dramatic week in which Lehman Brothers, the 158-year old investment bank was forced into bankruptcy, Merrill Lynch was quickly acquired by Bank of America and American International Group accepted a $85 billion government loan to avoid bankruptcy. Investors, who had feared a meltdown of the financial system, instead cheered a government proposal that became known last night to steady the economy and appeared more confident that the intervention could have a lasting impact.

"I think it's the feeling that instead of going at things on a case-by-case basis you will have a comprehensive solution," said Bill Stone, chief investment strategist for PNC Wealth Management. "The government is acting in the way they have learned you have to in these situations in order to prevent the ultimate downside risk."

Under the U.S. government's plan to stabilize the nation's financial system, Treasury is asking Congress for the authority to buy the distressed mortgages weighing down financial firms. This is expected to cost hundreds of billions of dollars. Treasury will also tap up to $50 billion from a Depression-era fund to insure the holdings of money-market mutual funds, intervening to shore up a sector once considered among the safest investments.

"Given the precarious state of today's financial markets, and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential," President Bush said today.

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