- The Washington Times - Saturday, September 20, 2008

NEW YORK | Wall Street extended a huge rally Friday as investors stormed back into the market, relieved that the government plans to restore calm to the financial system by rescuing banks from billions of dollars in bad debt. The Dow Jones Industrial Average rose about 370 points, a massive gain of about 780 over two days.

The plan to rescue banks from billions of dollars in soured debt has reassured investors who worried that a continuum of bad bets on mortgages would hobble more financial companies and cause even further damage to the banking system and the overall economy.

Analysts said it was the first government response decisive enough to restore confidence in the markets.

The government took other steps Friday to restore stability to the financial system. The Federal Reserve said it will expand its emergency lending and let commercial banks finance purchases of asset-backed paper from money market funds. The Fed injected another $20 billion in temporary reserves into the U.S. financial system. The central bank also will buy short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

And to help calm investors’ anxieties, the Treasury Department has decided to use a Depression-era fund to provide guarantees for U.S. money market mutual funds. Money market mutual funds are typically considered safe, but many investors have been fleeing them, fearing that the funds’ holdings included souring corporate debt.

It’s difficult to quantify how much of the market’s gains reflected short sellers who are forced to step in and cover their bets by buying now rising stocks that had predicted would fall. While that appeared to play some role in the advances Thursday and Friday, the Nasdaq Composite Index — dominated by big technology stocks, not financials — showed big gains along with the Dow and the Standard & Poor’s 500 Index.

The Dow rose 368.75, or 3.35 percent, to 11,388.44 after having been up as much as 463.36.

Friday was a quarterly “quadruple witching” day, which marks the simultaneous expiration of options contracts — an event that often adds to volatility and heavy volume.

Broader stock indicators also surged Friday. The S&P; 500 Index rose 48.57, or 4.03 percent, to 1,255.08, and the Nasdaq Composite Index rose 74.80, or 3.40 percent, to 2,273.90.

Even with Friday’s big gains, stocks didn’t end the week with much change after the whipsaw sessions. The Dow slipped 0.29 percent, the S&P; 500 rose 0.27 percent and the Nasdaq added 0.56 percent.

Treasury prices dropped as investors poured money back into stocks. The yield on the three-month Treasury bill - a safe investment to which investors have rushed this week - rose to 0.95 percent from 0.07 percent late Thursday. Yields move opposite from price. The yield on the benchmark 10-year Treasury note shot up to 3.81 percent from 3.53 percent late Thursday.

The stock market’s enormous swings during the week reveal how anxious investors have been about the tightness in the credit markets and the possibility that other financial companies might succumb to the difficulties in the markets. Moves Thursday by the Fed and other major central banks to inject billions into global money markets perhaps helped forestall steeper sell-offs but didn’t diffuse the confusion and overall loss of confidence hammering the markets as big financial companies including Lehman Brothers and AIG stumbled.

The only lasting move in a week of intense volatility came late in Thursday’s session when reports emerged that the government was considering a plan that would shift soured debt off financials’ books. A wobbly market rocketed higher, giving the Dow a 410-point gain for the session.

The dollar rose against most other major currencies in Friday trading, while gold prices jumped. Light, sweet crude rose $6.67 to settle at $104.55 a barrel on the New York Mercantile Exchange.

While stocks rose broadly, the financial sector was one of the strongest gainers. The two remaining independent investment banks logged big advances as fears dissipated that they would be felled by cash shortages and toxic debt.

Goldman Sachs Group Inc., jumped $21.80, or 20 percent, to $129.80, while Morgan Stanley jumped $4.66, or 21 percent, to $27.21.

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