Rays of Hope for Big Banks Spur Rally on Wall Street

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."

If Wall Street can retain even a portion of yesterday's rally, more investors may be willing to come back in the market, said Thomas F. Nordby, a senior broker at LaSalle Futures in Chicago. "The S&P needs to stay above the 705 magic number for more buyers to start coming in," he said. "The next few days are going to be very important."

In fact, investors were also being dealt more signs yesterday that corporations were shedding more jobs, seen by many as a way for companies to steady themselves during a deepening recession. United Technologies, a large industrial company, said it expects to lay off 11,600 employees. AOL said it is executing a second major round of layoffs, shedding 10 percent of its workforce.

Investors were cheered by indications that government regulators could step in to shield companies from Wall Street short sellers, traders who seek to profit from falling stock prices. The Securities and Exchange Commission said it may propose reinstating the "uptick rule," which until it was repealed in 2007 restricted short selling if the price of a stock being sold was lower than its previous trade. That could help prevent short sellers from rapidly driving down the price of a stock.

It would take time to implement it, after a period of public comment, said SEC spokesman John Nester.

Changing the rules would slow down short sellers, creating breathing room for investors, said Doug Roberts, chief investment strategist for Channel Capital Research of New Jersey. "It gives people pause so they can start thinking rationally as opposed to people panicking," he said.

The banking sector led the rally after Citigroup chief executive Vikram Pandit said in a letter to employees that the bank was having its best quarter since late summer 2007. Citigroup shares surged 38 percent, to $1.45.

That helped buoy the entire financial sector. Bank of America climbed 28 percent, to $4.79, while J.P. Morgan Chase gained 23 percent, to $19.50.

For weeks, investors have driven down the value of those companies as concern has mounted that federal efforts to rescue them would come up short or imperil shareholders.

"If Citigroup, which has been the poster child of the subprime implosion, can have a positive quarter, then can Bank of America? J.P. Morgan?" said Matt McCormick, a banking analyst at Bahl & Gaynor Investment Counsel, an investment management firm. "The real question is: Will they? That we don't know yet."

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