Stocks Soar 617 Points From Day's Low on Paulson's Resolution Trust Corp. Plan

Stock traders were euphoric yesterday after a CNBC reported late Thursday afternoon that that Treasury Secretary Henry Paulson is considering creating an entity like the Resolution Trust Corp., which was formed after the failure of savings and loan banks in the 1980s, to stabilize the financial markets. Stocks immediately rallied, posting the largest gain in six years.

Elizabeth Stanton of Bloomberg reported tonight:

Traders erupted into cheers on the floor of the New York Stock Exchange as the Dow Jones Industrial Average jumped 617 points from its low of the day after Senator Charles Schumer proposed a new agency to pump capital into financial companies. The Standard & Poor's 500 Index climbed 4.3 percent as 68 companies in the gauge rose more than 10 percent.

Wachovia Corp. soared 59 percent, Citigroup Inc. added 19 percent and Bank of America Corp. jumped 12 percent, sending the KBW Bank Index to its biggest gain since July. Morgan Stanley erased a 46 percent tumble and Goldman Sachs Group Inc. recovered most of a 25 percent slide after the nation's three largest pension funds stopped loaning shares of the brokerages to investors betting on their declines.

"Any actions regulators or other entities or players take to try to slow down the bear raids will be received positively," said David Katz, chief investment officer of Matrix Asset Advisors in New York, which manages $1.4 billion. "There's no reason a Goldman Sachs or a Morgan Stanley should be forced to sell themselves in a shotgun wedding if they've got economic models that work, and they do."

The S&P 500 advanced 50.12 points to 1,206.51, recovering most of yesterday's 4.7 percent tumble. The Dow surged 410.03, or 3.9 percent, to 11,019.69. Both the S&P 500 and Dow posted their biggest percentage gains since October 2002. The Nasdaq Composite Index jumped 100.25, or 4.8 percent, to 2,199.1. Seven stocks climbed for each that fell on the NYSE, its broadest rally since April.

The Chicago Tribune described a resolution trust corporation this way:

The best solution appears to be the creation of a new Resolution Trust Corporation. This was the mechanism used to resolve the savings and loans crisis approximately 15 years ago. The trust could either buy selected distressed assets through fair and transparent prices or create an orderly market for the disposition of assets from failed institutions. This would hopefully stabilize the market for mortgages and distressed assets. It would be designed to stop the current fire sales of assets which have a snowball effect as relatively healthy institutions mark their assets to lower and lower levels pushing more financial companies to the point of bankruptcy. Badly needed confidence would be restored.

Richard Cowan and Kevin Drawbaugh of Reuters elaborated on the Paulson proposal, and one by Sen. Charles Schumer (D-NY) :

A possible federal plan to calm financial markets and address the housing crisis began to take shape on Thursday, with rival proposals from U.S. Treasury Secretary Henry Paulson and Sen. Charles Schumer.

Paulson has been talking with congressional leaders about possibly setting up a federal agency to deal with the broken mortgage debt instruments that are choking global capital markets, said a congressional aide and a lobbyist.

"It's a modernized version of the Resolution Trust Corporation (RTC), which was used after the S&L crisis," said the aide, declining to be further identified.

Schumer offered a different idea in a speech urging that future federal capital infusions for banks be conditioned on their making loan modifications and other terms.

The New York Democrat proposed setting up a federal agency that would "provide capital to struggling financial institutions in exchange for an equity stake in the banks," similar to the Depression-era Reconstruction Finance Corp (RFC).