Rays of Hope for Big Banks Spur Rally on Wall Street

Federal Reserve Chairman Ben Bernanke called for broad regulatory reform while addressing the Council of Foreign Relations. Video by AP
By Renae Merle and Alejandro Lazo
Washington Post Staff Writers
Wednesday, March 11, 2009

Hope staged a rally on Wall Street yesterday after one of the nation's most troubled banks said it made money the past two months and Federal Reserve Chairman Ben S. Bernanke called for an overhaul of rules that govern the financial system.

Beleaguered investors latched on to those nuggets of positive news for the biggest one-day gain this year. The leap helped wipe away more than a week of losses in which stocks lumbered to their lowest levels in 12 years. Every stock on the Dow Jones industrial average closed in positive territory, though the recovery was led by double-digit-percentage gains in the financial sector. The Dow, an index of 30 blue-chip stocks, climbed 5.8 percent, or 379.44 points, to 6926.49.

At the center of the rebound was Citigroup, which reversed the drumbeat of negative news about the health of the nation's banks by announcing that it earned a profit during the first two months of the year. But Citigroup and the rest of the financial sector still face problems that could turn yesterday's rally into merely a short respite amid steep sell-offs, analysts said.

Investors were also bolstered by signs that federal regulators could restrain short selling of stocks, a type of trading blamed by some in the financial services industry for dragging down shares.

Much of the focus yesterday was on a speech by Bernanke before the Council on Foreign Relations, calling for reforms that would prevent another financial crisis. He called for a review of accounting rules governing how companies value assets, an issue that has bedeviled banks weighed down by toxic mortgage loans. Wall Street firms have lobbied for changes to "mark-to-market" rules, which require them to value certain assets based on what they would be worth if they sold them now -- not much, given the collapse of the markets.

Bernanke suggested that policymakers "try to make some improvements" to that system, possibly allowing certain assets to be priced at their underlying economic value instead, which would probably be higher.

He also said that to help prevent future crises, firms considered "too big to fail" should receive close supervision from regulators.

"The chairman outlined a number of key initiatives that seem to be giving some shape to the evolution of financial reform, and so, in a small way, the statements helped provide a little bit more clarity to frustrated investors," said Alan Gayle, senior investment strategist at RidgeWorth Investments.

Despite the rally, the Dow is still down 21 percent this year and more than 50 percent from its peak in 2007. The Standard & Poor's 500-stock index, a broader market measure, gained 6.4 percent, or 43.07 points, to 719.60 yesterday, closing above 700 for the first time in four trading days. The tech-heavy Nasdaq composite index had the biggest rebound, jumping 7.1 percent, or 89.64 points, to 1358.28.

"There is finally some good news out there for once," said Andrew Brooks, head of stock trading at T. Rowe Price. "The selling has been unabated, if you will. One up day does not improve the entire framework, but it sure feels a lot better."

But analysts warned that banks have not worked through many of their problems and said yesterday's rebound was a reflection of a desire for signs that the country's financial sector was recovering, rather than any real evidence. That may make the rally difficult to sustain.

"You don't need positive news; you just need the end of a wave of horrendous, negative news, and I think that is where we could be at right now," said David Dreman, founder and chairman of Dreman Value Management. "Are markets going to rally more? It depends on what news we get out there."

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