Wall St. Cheers Plan to Absorb Bad Assets

Stocks rallied yesterday as the Federal Reserve announced that it would keep short-term interest rates near zero and the Obama administration mulled creating an institution to absorb the toxic assets of financial institutions.

The Dow Jones industrial average rose 200.72 points, or 2.5 percent, to 8375.45, while the Standard & Poor's 500-stock index was up 28.38, or 3.4 percent, to 874.09. It was the third straight day of gains, leaving the Dow about 11 percent above the low it hit on Nov. 20.

The tech-heavy Nasdaq composite index surged 53.44 points, or 3.6 percent, to 1558.34. It was buoyed, in part, by better-than-expected earnings from Yahoo and Sun Microsystems, whose shares rose 8 percent and 22 percent, respectively.

Investors were focused on the possibility that the government might create a "bad bank" to buy up troubled assets. "The epicenter of this crisis has been banking," said James Cox, managing partner at Harris Financial Group. "If we can fix banking, we can move credit markets in the right direction."

The government proposal boosted financial stocks. Bank of America and Citigroup had the biggest gains in the Dow, climbing 14 percent and 19 percent, respectively. J.P. Morgan Chase was up 10 percent.

Wells Fargo's shares surged 31 percent despite the bank's announcement that it lost $2.55 billion in the fourth quarter. Wells Fargo also said it did not expect to need more federal aid and declared a quarterly dividend.

"We did make some mistakes, but, for the most part, we maintained our credit discipline," John Stumpf, Wells Fargo's chief executive, said in a statement.

The House voted 244 to 188 to approve a more than $800 million economic stimulus package late yesterday, which investors have seen as a potential boost to the economy. "There are a multitude of government plans starting to trickle in, and that has people euphoric," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel.

Traders were also focused yesterday on the conclusion of a two-day Federal Reserve meeting. The Fed's policymaking committee said it would keep a key rate low for some time, as analysts expected. But Fed leaders also concluded that the economy is worsening sharply.

The Fed "did not break new ground," Marc Chandler, global head of currency strategy for Brown Brothers Harriman, said in a research note. But "its economic assessment is somber."

Crude oil prices rose modestly to $42.16 a barrel on the New York Mercantile Exchange.