Stocks rally on report of federal entity for banks' debt; Dow up 410

ByABC News
September 18, 2008, 5:53 PM

NEW YORK -- Stocks had a stunning late-session turnaround Thursday, shooting higher and hurtling the Dow Jones industrials up more than 400 points after a report that the federal government may create an entity that will take over banks' bad debt.

The report on CNBC said Treasury Secretary Henry Paulson is considering the formation of an entity like the Resolution Trust Corp. that was set up after the failure of savings and loan banks in the 1980s.

The Treasury Department and Federal Reserve declined to comment Thursday on any discussions Paulson may have had with lawmakers about a Resolution Trust Corporation-style fix for a financial market crisis.

"We're not going to comment on rumors," Treasury spokeswoman Jennifer Zuccarelli said.

But investors were cheered by the notion of a huge federal intervention like the establishment of RTC to acquire the real estate debt that has hobbled financial institutions and led to the intense volatility in the markets this week.

If there's an RTC-like entity, "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. That would alleviate many of the pressures causing the credit crisis, he said, and open up the credit markets again. 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.

However, Fullman added, "the devil's in the details."

According to preliminary calculations, the Dow soared 410.03, or 3.86%, to 11,019.69.

Broader stock indicators also jumped. The Standard & Poor's 500 index rose 49.86, or 4.31%, to 1,206.25, and the Nasdaq composite index advanced 100.25, or 4.78%, to 2,199.10.

The report of a broader government bailout proved more reassuring to investors than moves before the opening bell Thursday by the Federal Reserve and other major central banks to inject as much as $180 billion into global money markets. The moves were an attempt to keep the credit crisis from worsening; the Fed added another $55 billion in overnight loans Thursday.