Stocks Surge on Report of Entity for Bad Debt

Wall Street rallied in a stunning late-session turnaround Thursday, shooting higher and hurtling the Dow Jones industrials up 400 points following a report that the federal government might create an entity to absorb banks' bad debt. The report also cooled investors' fervor for safe investments like government debt that were in demand for much of the day.

The report that Treasury Secretary Henry Paulson is considering the formation of a vehicle like the Resolution Trust Corp. that was set up during the savings and loan crisis of the late 1980s and early 1990s left previously solemn investors ebullient. Wall Street hoped a huge federal intervention could help financial institutions jettison bad mortgage debt and stop the drain on capital that has already taken down companies including Bear Stearns Cos. and Lehman Brothers Holdings Inc.

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Worries about financial landmines on companies' books have essentially crippled parts of the world's financial markets in recent days and led to the intense volatility in the markets this week.

"It's going to take a lot of the bad debt off the balance sheets of these companies," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York, commenting on the possibilities of an entity akin to the RTC. It could alleviate many of the pressures causing the credit crisis, he said, and reopen moribund credit markets. But Fullman noted, "the devil's in the details."

"Bear markets are very sensitive to news. And on a scale of 1 to 10, this one is a 13," he said of the report.

The report from CNBC gave direction to a market that had weaved in and out of positive territory for much of the session as investors shuttled between the safety of Treasury bills and gold and the bargains posed by stocks that have been pounded lower.

The Dow soared 410.03, or 3.86 percent, to 11,019.69, surging 560 points from its low of the day, 10,459.44. It was the Dow's biggest percentage point gain since October 2002 but still leaves the index down about 400 for the week after routs Monday and Wednesday.