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Rescue Rally, Day 2
Investors Bet Big on Plan To Revive Financial System

By Renae Merle
Washington Post Staff Writer
Saturday, September 20, 2008

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 a nearly 400-point rally yesterday 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 368.75 points, or 3.35 percent, at 11,388.44. That is on top of a 410-point gain Thursday after news of a government rescue effort emerged, and it brings the index near break-even for the week -- despite Monday's 500-point loss and Wednesday's 450-point loss.

The technology-heavy Nasdaq composite index gained 74.80, or 3.4 percent, closing at 2273.90. The Standard & Poor's 500-stock index rose 48.57, or 4.03 percent, to close at 1255.08. After also taking massive losses in recent days, the Nasdaq and S&P ended the week in positive territory.

Global markets also closed higher. European stocks rose on the order of 5 to 9 percent, while Asian markets added 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 household 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 the mortgage giants Fannie Mae and Freddie Mac two weeks ago.

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

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

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 it 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.

U.S. financial stocks, which had traded at deep losses this week, shot up yesterday. Goldman Sachs and Morgan Stanley, the two remaining investment banks, rose 20 percent and 21 percent, respectively. Both have endured questions about their ability to remain independent.

"It's just breathing space," said Sean Ryan, a banking analyst at Sterne Agee in New York. "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. Media reports indicated that potential bidders had emerged for the thrift, 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.

Staff writer Howard Schneider contributed to this report.

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