- The Washington Times - Wednesday, January 28, 2009

UPDATED:

Wall Street soared Wednesday as financial stocks led a rally based on investor hopes that the Obama administration will create a “bad bank” that will clear debts from the banking system and that the House will pass the $825 billion economic stimulus package.

At the close, the Dow Jones Industrial Average surged 201.27 points, or 2.46 percent, to 8376. The tech-laden Nasdaq bolted 53.44, or 3.55 percent, to 1558.34. The broader Standard & Poor’s 500 climbed 28.41, or 3.36 percent, to 874.12.

Financial stocks, which have dragged down the markets because of fears the banking system could collapse, made the day for investors, who also were buoyed by a Federal Reserve decision to keep the key federal funds rate at between zero and 0.25 percent. That’s the rate that banks charge each other for overnight loans.

Significantly, the central bank said it would maintain that record low rate for “some time.” It predicted that “a gradual recovery in economic activity will begin later this year” but warned that the “downside risks to that outlook are significant.”

Shares of Wells Fargo, whose fourth-quarter loss of $2.83 billion did not seem to deter investor confidence in the bank as it absorbs troubled Wachovia Corp., soared 31 percent, and those of ailing Citigroup jumped more than 17 percent.

Though the markets opened higher, the catalyst for the surge was increasing hope that the Treasury Department will create a “bad bank” that would take on the debts of the major banks caught up in the financial crisis because of the housing bust. President Obama and Fed Chairman Ben S. Bernanke favor such a move.

There is precedent for such a bank — the Resolution Trust Corp., which was created during the savings and loan crisis of the late 1980s, said Tom Sowanick, chief investment officer of Clearbrook Financial LLC of Princeton, N.J.

“There’s optimism that the Obama administration will create a bad bank that would allow the banks to go about their business,” he told The Washington Times. “This was the original intent of the bailout. It’s much more efficient than giving the banks cash.”

Congress authorized $700 billion after the economic crash in the fall to bail out banks that were sustaining heavy losses because of the housing and mortgage collapse in hopes that the money could be used to encourage them to lend to businesses and consumers. They didn’t. Only $350 billion of the original amount has been spent.

Treasury Secretary Timothy F. Geithner has indicated the second $350 billion will be used differently.

Separate from the bailout money, Mr. Sowanick said, there is optimism the Fed will take on the credit card and auto loan debt of the banks “to take it off their shoulders and put it on the [Fed’s] balance sheets.”

It would not necessarily mean heavy losses for the Fed, he said, because “the vast number of people do pay their auto loans and credit card debts.”

Another boost for the market was expectations that the administration’s stimulus package will be passed by the House on Wednesday night, despite Republican opposition. Democrats control the House and Senate.

President Obama, saying the country is at a “perilous moment” because of the economic crisis that has caused the loss of tens of thousands of jobs just this week, has made it clear he would like Congress to pass his stimulus plan as quickly as possible.

Mr. Sowanick said that Wall Street has been on “a very slow relief rally” since Mr. Obama was inaugurated Jan. 20 and that it was likely to continue if politics in Washington do not interrupt efforts to push the economy toward a recovery.

“It’s not fireworks, but it’s a nice steady grind to higher levels,” he said of the markets. “If we get action from Washington quickly, the odds of it being sustained are higher.”


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