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FINANCIAL SYSTEM IN CRISIS

Stocks rally after U.S. intervenes

Dow gains 410 points as Washington weighs action, including buying up bad assets.

September 19, 2008|Martin Zimmerman | Times Staff Writer

For a few hours Thursday on Wall Street, greed finally got the upper hand on fear.

The Dow Jones industrial average soared more than 400 points -- notching its biggest one-day percentage gain in almost six years -- as investors welcomed word that the federal government was weighing a comprehensive plan to end the financial crisis.

Pledges by regulators to increase oversight of short sellers -- traders who profit from falling share prices -- also buoyed stocks.

The rally, which followed the Dow's 449-point plunge Wednesday, was a welcome respite for investors who have been battered by a global crisis that has choked off credit, toppled storied financial institutions and threatened economic growth here and abroad.

"The market was really just looking for some semblance of good news, and for the time being this was enough to send it higher," said Kevin Marder of Marder Investment Advisors Corp. in Los Angeles.

The key is whether the talk of government action turns into concrete results. Congressional leaders met Thursday night in Washington with top Bush administration officials, including Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke and Securities and Exchange Commission Chairman Christopher Cox, to discuss options for defusing the crisis.

Officials said late Thursday that the government would step in to relieve some financial institutions of their bad assets.

"If they can free up capital and get the banks lending again, then it's a whole new ballgame," said William Buechler of Buechler Capital Asset Management in La Jolla.

The SEC reportedly was preparing new restrictions on short selling, the practice of borrowing and then selling shares with the intention of repaying the loan with shares bought later at a lower price. Short sellers have received some blame for the precipitous price declines in shares of financial companies such as Lehman Bros. Holdings, Morgan Stanley and Goldman Sachs Group.

The Dow finished the day up 410.03 points, or 3.9%, at 11,019.69. It was the blue-chip index's biggest percentage gain since October 2002. The broader Standard & Poor's 500 index rose 50.12 points, or 4.3%, to 1,206.51. The tech-heavy Nasdaq composite soared 100.25 points, or 4.8%, to 2,199.10.

Winners outnumbered losers 3 to 1 on the New York Stock Exchange. Long-term Treasury yields rose as investors moved from bonds into stocks. Volume was heavy in part because traders were positioning themselves for today's quarterly expiration of option contracts, which can add to volatility.

The Dow is still off 400 points for the week, and some analysts warned that solving the immediate crisis wouldn't necessarily bring lasting relief to shellshocked investors. Joe Battipaglia, market strategist at Stifel, Nicolaus & Co., said the U.S. economy faced challenges beyond the current credit crunch, including the housing downturn and weakness in the job market.

"Until these fundamental conditions start to improve, the most you can hope for is for [government] policies that try to mitigate the blowout," he said. "That is not the basis for a new bull market."

Battipaglia cited a Labor Department report Thursday showing an unexpected jump in jobless claims last week.

During the day's volatile trading, the Dow was off 150 points at one point. The late rally was led by financial stocks, which have borne the brunt of the selling over the last week. They were by far the best-performing sector of the S&P 500, gaining 12%.

The burst of buying came after Sen. Charles E. Schumer (D-N.Y.), chairman of the congressional Joint Economic Committee, said the Treasury Department and the Federal Reserve were working on a "permanent" solution to the financial crisis.

New rules to rein in short sellers could help stabilize the markets, Marder said.

"Normally, I'm a hands-off guy as far as the markets go, but given the gravity of the situation, I think it's warranted," he said. "People that don't agree with this move might be a little too shortsighted, no pun intended."

The SEC late Wednesday said that it planned to require big investors to publicly disclose their short sales. And on Thursday, British regulators imposed an outright ban on short selling of financial stocks.

Also Thursday, New York Atty. Gen. Andrew Cuomo said he was investigating short selling of shares of Lehman, American International Group and other financial stocks.

Short selling itself is not illegal. Cuomo said he would be looking for evidence that short sellers spread false information to artificially force down shares they were shorting.

The regulatory moves may have contributed to Thursday's big stock rally by persuading many short sellers to "cover" their short positions by buying shares, some analysts said.

For example, shares of investment banking giant Morgan Stanley fell as low as $11.70 amid signs that it might have to seek a merger with a commercial bank to shore up its capital base. But the stock rebounded later in the day, closing at $22.55, up 80 cents.

Goldman Sachs fell as low as $85.88 but closed at $108, down $6.50.

Shares of some Southern California lenders also seemed to benefit from short covering. FirstFed Financial of Los Angeles soared 45%. Downey Financial of Newport Beach shot up 66 cents, or 43%, to $2.20. Pasadena's East West Bancorp jumped $2.33, or 17%, to $16.13.

Also Thursday, Dow Jones & Co. announced that AIG would be replaced Monday in the Dow industrial average by Kraft Foods.

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martin.zimmerman@latimes.com

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RELATED STORIES

Plan: Government will buy bad assets of some institutions. Page A1

Relief agency? Officials may take a page from the S&L debacle. Page A1

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