Nations act, markets soar
Dow up 936 on signals of aid for banks
US stocks rocketed out of the doldrums yesterday, shaking off eight days of losses as officials in the United States and Europe took steps to bolster their banking systems.
The Dow Jones industrial average soared a record 936 points, or 11 percent - the largest percentage gain since 1933 - after last week's pummeling dealt big stocks their worst week ever. The Dow ended at 9,387.61, on a day when the bond market was closed and many Americans were home for the Columbus Day holiday.
Europe led the charge yesterday, pledging $2.3 trillion to back its financial institutions. Great Britain invested $63 billion in equity in three of its largest banks - in a move similar to what the US Treasury was hammering out yesterday. European stocks rallied on the news and notched record gains, setting the tone for US stocks when the market opened.
"This isn't a systemic collapse of the world's banks, and that's a huge relief," said James T. Swanson, chief investment strategist at MFS Investments in Boston. Seeing hard evidence that governments are pumping fresh capital into banks "unlocked a lot of the bad feelings," that have been dragging down the market, he said.
This morning the US Treasury is slated to unveil the details of its plan to shore up the banking system. The government is expected to buy about $250 billion of equity in several large US banks, including Bank of America Corp. and State Street Corp., according to media reports. In addition, the Federal Deposit Insurance Corp. would temporarily guarantee all deposits in noninterest-bearing accounts, generally used by businesses.
Investors, anticipating the government plan, started to hope the market may finally have hit bottom after losing 2,400 points over the last two weeks. Swanson said that by even the gloomiest earnings forecasts, the stock market is undervalued and "should be higher than it is today."
Bruce Addison, a senior vice president and financial consultant at RBC Wealth Management in Norwell, said yesterday's rally was a relief to investors. "On Friday, the pain level hit 10," he said. "We're hoping we saw the bottom on Friday."
Yesterday's historic gain shattered the previous daily record of 499 points recorded during the end of the dot-com boom in March 2000. Despite the rally, the Dow is still down 29 percent for the year.
President Bush yesterday applauded the actions taken by Europe's finance chiefs to strengthen that continent's banks, and said, "The United States is also acting, and we will continue to implement measures consistent with the G7 action plan to help banks gain access to capital, to strengthen the financial system, and to unfreeze credit markets and restore confidence in our financial system."
Meanwhile, Wall Street's top bankers met in Washington for briefings by Treasury Secretary Henry M. Paulson Jr. and Neel T. Kashkari, the interim chief of the $700 billion bailout plan. Among those in attendance were the chief executives of Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Merrill Lynch & Co., and Morgan Stanley. Kashkari said the plan would focus on "healthy" banks.
The British bought preferred shares and common shares in Citizens Bank parent Royal Bank of Scotland, Lloyds, and HBOS, in exchange for board seats, a degree of control, and assurances that the banks would start lending to customers again. The US plan, originally floated last week, was to buy only banks' preferred shares, which pay dividends but offer no voting rights.
The goal of these plans is to inject cash into banks so they will lend to each other and to their customers.
Lending has virtually ground to a halt causing a global credit crunch and hurting financial markets worldwide.
The British banks that agreed to the government investments saw their stocks fall yesterday, even as the rest of the market rallied.
Major US bank stocks surged yesterday, with Bank of America rising 9.2 percent to $22.79, and Citigroup shares gaining 11.6 percent to $15.75. Morgan Stanley shares jumped 87 percent to $18.10 when Japan's Mitsubishi UFJ Financial Group Inc. confirmed its $9 billion investment in the firm. Morgan's shares had sputtered Friday on fears the investment might not come through.
Locally, Sovereign Bancorp shares fell 3.4 percent to $3.68, despite news that Spain's Banco Santander was in talks to buy the Pennsylvania bank which has a large Boston presence. The deal was completed after the market's close. State Street Corp. shares climbed nearly 12 percent to $48.35; EMC Corp. gained 12 percent, to close at $11.31.
Oil prices, which had been slumping, jumped 4 percent, to $81 a barrel.
The stocks surge continued in the Asian markets today. The Nikkei index, Japan's key benchmark, had rocketed more than 1,000 points, or 13 percent, by midday. It fell 24 percent last week.
Barack Obama, the Democratic nominee for president, yesterday unveiled an economic plan that included a call for the Federal Reserve to loan funds to state and local governments. States and municipalities across the country have been unable to issue bonds to pay for operations and services in recent weeks, because investors such as money market funds were looking for even safer vehicles, such as US Treasury notes. At least two states, Massachusetts and California, have discussed seeking loans from the Federal Reserve. Massachusetts was finally able to raise money in the debt market last week and said it didn't need federal money.
John McCain, the Republican presidential candidate, is expected to roll out a new economic package as soon as today to help businesses and families. McCain also has supported easing withdrawal rules on retirement plans for seniors.
Beth Healy can be reached at bhealy@globe.com. Ross Kerber of the Globe staff contributed to this article. 