Hopes for Bailout Deal Spur Late Rebound

After languishing most of the day, stocks staged a tepid rebound in late trading yesterday as investor confidence grew that congressional negotiators would reach a deal on a $700 billion bailout of the financial sector.

After a triple-digit drop at the opening bell, the Dow Jones industrial average closed up 121.07 points after House Republicans rejoined negotiations on the plan, which would allow the government to buy up the bad debt of troubled financial firms. The White House said a deal could be done by the beginning of market trading Monday.

The talks overshadowed the failure of the country's largest savings and loan late Thursday and news that the economy did not grow as much as thought in the second quarter. The gross domestic product expanded at a rate of 2.8 percent during the quarter rather than the 3.3 percent rate previously estimated.

The Dow rose 1.1 percent, to 11,143.13, but was down 2.2 percent for the week. The moves were less pronounced on the broader Standard & Poor's 500-stock index, which was up 3.83, closing at 1213.01. The technology-heavy Nasdaq fell 3.23 to 2183.34. Those indexes fell 3.3 and 4 percent respectively for the week.

The bounce was driven by several financial stocks, including Bank of America, Citigroup and J.P. Morgan Chase, which could benefit from passage of the legislation, said Doug Roberts, chief investment strategist for New Jersey-based Channel Capital Research. J.P. Morgan was up 11 percent yesterday, while Bank of America gained 7 percent and Citigroup 4 percent. "They [investors] are betting that there is going to be some sort of bailout, or some sort of reprieve," he said.

However, enthusiasm for financial companies was muted by the collapse of mortgage lender Washington Mutual, which was seized by federal regulators late Thursday in the largest bank failure in U.S. history. Much of the company was sold to J.P. Morgan for $1.9 billion.

Washington Mutual's shares fell 91 percent to close at 16 cents. The company's collapse spread concern to other banks considered vulnerable. Wachovia fell 27 percent to close at $10 a share. National City fell 26 percent to $3.71.

Another government-chartered mortgage financing firm has also worried investors. Shares of Federal Agricultural Mortgage, which buys U.S. farm loans, have lost more than 80 percent over the past week. The firm, known as Farmer Mac, said earlier this month that it would suffer losses related to investments in Fannie Mae, which was taken over by the government, and in Lehman Brothers, which filed for bankruptcy protection.

Farmer Mac's shares fell 39 percent yesterday to $2.86. They closed at $18.12 last Friday.