U.S. Stock Markets Soar on Financial Rescue Plan

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Wall Street in Turmoil

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.

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Treasury is expected to work through the weekend with congressional leaders on the plan. "Despite these steps, more is needed. We must now take further decisive action to fundamentally and comprehensively address the root cause of our financial system stresses," Treasury Secretary Henry M. Paulson Jr. said at a news conference today.

But the costs of the program are high, and questions remain about how quickly Congress will be able to act. There is $800 billion in subprime and other types of high-risk loans on the books of financial firms around the world, most of them on U.S. balance sheets, said Brian Bethune, chief U.S. financial economist for Global Insight.

"Conceivably they could do it. It's not outside the realm of possibility, but it is going to require a lot of rapid footwork here," Bethune said.

Details of Treasury's proposals remain elusive, and the plan doesn't address other issues hampering the economy, including declining home values, said Sean Ryan, an banking analyst at Sterne Agee in New York. "It will be either ineffective or it will be a really grotesque bailout of the worst-managed institutions in the country in providing money to buy these bad assets."

Helping boost financial stocks, the Securities and Exchange Commission said overnight that it would temporarily ban short selling of the sector's shares. Short sellers place bets that shares will fall and have been blamed, in part, for dragging down the shares of financial firms and threatening their existence.

Global markets seemed to respond to both the U.S. promise of broader relief and the immediate disappearance -- for now -- of the effects of short selling.

Hong Kong's Hang Seng index closed nearly 10 percent higher, and other major Asian exchanges rose by anywhere from 4 to 6 percent.

London's FTSE 100 was higher by nearly 9 percent, with financial stocks there reacting dramatically to action by the country's Financial Services Authority. Similar to the steps announced by the SEC, British authorities limited short selling in 29 financial companies, including Lloyds TSB bank and its recent takeover target, mortgage company HBOS. The list also included the Royal Bank of Scotland and several insurance companies whose stocks have been plummeting.

The stock exchange in Russia jumped so quickly at its open -- a full 18 percent -- that regulators temporarily suspended trading.

U.S. financial stocks, which have traded at deep losses this week, shot up today. Goldman Sachs and Morgan Stanley, the two remaining investment banks, were up 18 percent and 16 percent respectively. Both has endured questions about their ability to remain independent.

"It's just breathing space," said Ryan. "In the long term it doesn't help at all, but in the short term it stops the bear raid on Morgan Stanley and Goldman Sachs."

Washington Mutual, which has also faced market pressure, shot up 63 percent in early trading, then closed at $4.25, up 42 percent. There was a report today that six potential bidders had emerged for Washington Mutual, but analysts said that the government's actions could help slow the industry's frenzied pace of consolidation. Financial firms now may be able to hold off pressure from market skeptics, while the government implements its rescue plan, they said.

"These companies have likely bought some time before they have to run into the arms of someone else," Stone said.

While the details in many cases are still being worked out, the financial market has forever changed, analysts said, from the demise of two large players -- Lehman and Merrill -- and the bail out of another, AIG. "The only thing that is certain is that we have seen the end of the old financial order and the probability that the federal government will play a much larger role in matters of finance," said Brusuelas from Merk.

Staff writer Howard Schneider contributed to this report.