NEW YORK — White-hot worries about the country's banks have cooled noticeably as expectations have grown that the Obama administration will create a "bad bank" to clean all the toxic debt off the financial sector's balance sheets.
Speculation about such a plan, raising hope that financial institutions could eventually emerge from the welter of bad loans that have weighed them down, caused share prices of banking companies to surge, pushing the overall stock market up sharply.
An index of 24 bank stocks shot up 14%. The broad Standard & Poor's 500 index climbed 3.4%, while the Dow Jones industrial average gained more than 200 points, or 2.5%. Stocks in Europe also rallied on optimism about the financial sector.
"The message of the markets has been that there may be light at the end of this tunnel," said Hugh Johnson, head of Johnson Illington Advisors in Albany, N.Y.
Shares of Citigroup Inc. gained 19%, while Bank of America Corp. surged 14%, JPMorgan Chase Inc. climbed 10% and money manager State Street Corp. ballooned 31%.
Despite getting capital infusions in the tens of billions of dollars from the federal government since last fall, banks still have been viewed with concern, in large part because of home loans and mortgage-backed securities -- assets that have generated fresh losses each quarter as the housing downturn has accelerated.
Freeing banks of those assets was the idea behind the government's original bailout plan, known as the Troubled Asset Relief Program. But it was abandoned in part because of questions over how much the government would pay. Underpaying could leave banks with insufficient capital, whereas overpaying would reward them at the expense of U.S. taxpayers.
Anticipation of a bad-bank plan also eased fears that the government would move to take more drastic action to nationalize the industry, which has rattled investors all month.
"There's just a little bit more of a level of confidence that the government is doing something without saying, 'We're going to call the shots from here on out,' " said Joe Cusick, senior market analyst at Chicago-based brokerage OptionsXpress.
The rally trumped a continuing string of disappointing bank earnings reports -- the latest coming Wednesday from Wells Fargo & Co.
Wells Fargo shares swelled 31% even though the San Francisco company reported a net loss of $2.6 billion. The bank also wrote down by $37.2 billion a portfolio of risky loans inherited from Wachovia Corp., which Wells bought during the quarter.
