- The Washington Times - Wednesday, March 11, 2009

Wall Street staged a powerful rally Tuesday on positive earnings news from Citigroup, a promise of regulatory relief from the chairman of the Federal Reserve and calls from a key congressman to reinstate rules to make it harder to profit from falling stock prices.

The combination sparked a sharp pullback by a legion of short-sellers of major financial stocks and sent the Dow Jones Industrial Average surging 379 points to 6,926.

Major stock indexes took off at the opening bell and gained nearly 6 percent after Citigroup’s chief executive said the giant New York bank is enjoying its best profits since 2007 as a result of cost-cutting measures and low interest rates, though he did not mention that those profits are likely to be offset substantially by further losses on Citi’s huge bad-loan portfolios.

Later in the day, hopes were sparked that Citi and other banks will get some relief from federal rules that have helped drive their loan losses. Federal Reserve Chairman Ben S. Bernanke and House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, said they supported adding “flexibility” to rules that force banks to slash the values of their assets to the prices they would fetch in today’s depressed markets.

The markdown rules are a major reason why banks like Citi have been forced to record deep losses that have driven them to the edge of insolvency. The mounting losses have forced banks to raise billions more dollars to bolster their cash cushions, and to seek federal rescues.

In addition to easing the rules governing losses, Mr. Frank said, securities regulators within a month are likely to reinstate a stock market rule that makes it harder for investors to profit by betting against stocks in a bear market. These short-sellers helped drive Citigroup’s shares below $1 for the first time last week and helped send General Electric Co.’s stock to less than $7.

Citi shares surged 38 percent Tuesday, while Bank of America jumped 28 percent. GE leapt 20 percent, with financial stocks leading the strong market rally. The Dow ended up 5.8 percent. The Standard & Poor’s 500 Index soared 6.4 percent to 719.

Mark Frey, vice president at Custom House, a Canadian investment firm, said the market’s remarkable about-face was felt worldwide. Stock indexes surged from Bonn to Brazil.

“A simple comment from one of the biggest names in the financial sector has sparked a significant rally in equities that is transferring over to all other asset classes,” he said, referring to Citigroup chief executive Vikram Pandit’s boast of achieving profitability in the first two months of the year and projecting first-quarter earnings of $8.3 billion, before taxes, and one-time charges for credit losses.

“Though one could argue that 2008 doesn’t form much of a comparison, his guidance does at least allow us to believe that the storied franchise is in the process of turning things around,” Mr. Frey said. “Mr. Pandit has created a veritable risk-acceptance rally.”

David Kelly, chief market strategist at JPMorgan Funds, said regulators’ move to alter rules that have been troublesome for banks should soothe the markets.

“A growing number of voices in both Washington and Wall Street suggest that a loosening of regulation on mark-to-market accounting, combined with a tightening of regulations on credit default swaps and short-selling, could reduce market volatility and its impact on the economy,” he said.

Mr. Bernanke, in a speech to the Council on Foreign Relations, said that “we should review regulatory policies and accounting rules to ensure they do not induce excessive” swings in the financial system and economy.

Mr. Frank said his committee will push to make the mark-to-market rules more flexible in valuing the worth of assets that banks plan to hold to maturity, and to use discretion when deciding how much of a write-down banks must take on troubled assets.

He said he had talked with President Obama’s pick to head the Securities and Exchange Commission, Mary Schapiro, about quickly reinstating the so-called “uptick rule,” which forces short-sellers in the market to wait until a stock moves up in price before selling it.

The SEC could propose restoring the uptick rule, which it eliminated in July 2007, as early as next month, an agency spokesman said.

“Some think it is important, some think it is unimportant” in dampening big market falls like the ones seen since September, Mr. Frank said. “Nobody says it does any harm.”

Brian Gardner, a Washington analyst at Keefe, Bruyette & Woods, said he does not expect a wholesale suspension of the troublesome accounting rules, which many economists defend as the most honest way to value banks’ assets. But he expects regulators to “ease the tests for determining fair value” and make other adjustments that will be helpful for banks.

“We question whether any such changes will fundamentally change the market,” Mr. Gardner said, noting that a change in accounting does not change the real-world losses for banks. “We expect that investors, regardless of the accounting rules, will continue to mark down assets until economic conditions improve.”

Jeffrey Kleintop, chief market strategist at LPL Financial, said the stock market was overdue for a 10 percent to 20 percent “bounce” after falling to 12-year lows last week.

“Investors had priced in a scenario even worse than the Great Depression,” he said. In the past, “the stock market has only stayed this cheap if inflation was in the double digits. Currently, inflation is 0 percent.”

• David Sands contributed to this report.

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