US stock markets post record gains on encouraging government moves

After days of stock market mayhem, Thursday and Friday finally bought some good news to beleaguered American investors. Following up Thursday's gains, stock indexes rocketed even higher yesterday, with the major ones wiping out a week of shattering losses, as Wall Street cheered the government's effort to unfreeze credit markets as well as plans to move against short sellers.

Investors stormed back into the market, relieved that the government plans to rescue banks from billions of dollars in bad debt. The Dow Jones industrials rose more than 375 points, giving them a massive gain of more than 785 points over two days. The newly-declared ban on short selling, or placing bets that a stock will fall, was likely adding to the market's gains. The gain, percentage-wise, was the Dow's maximum in almost five years.

American International Group Inc. (AIG) was flying 56.5 per cent higher, with major shareholders of the giant insurer said to be pursing a bid to pay off the federal government's loan to AIG in time to avoid the government taking an 80 per cent stake in the company, the Wall Street Journal said in an online report.

Citigroup Inc. also bolstered the Dow, up 23.7 per cent, followed by Bank of America Corp., recently ahead 17.7 per cent. Financials rallied off the Dow as well, with shares of Lehman Brothers Holdings Inc. climbing 16 cents, or 303.9 per cent, to 21 cents a share. Shares of Goldman Sachs Group rose 17.2 per cent and Morgan Stanley gained 20.2 per cent.

US Treasury Secretary Henry Paulson, speaking about a rescue plan said a bold approach is needed to remove troubled assets from the books of financial firms. He offered few details, but said he would work on it through the weekend with congressional leaders.

A plan to help the banking industry could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has grinded to a virtual standstill in the wake of this week's bankruptcy of Lehman Brothers and the bailout of teetering insurer AIG.

The government took other steps Friday to restore stability to the financial system. The Federal Reserve said it will expand its emergency lending and let commercial banks finance purchases of asset-backed paper from money market funds. The Fed will also buy short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

And to help calm investors' anxieties, the Treasury Department has decided to use a Depression-era fund to provide guarantees for US money market mutual funds. Money market mutual funds are typically considered safe, but many investors have been fleeing them due to worries about the funds' exposure to souring corporate debt.

To help limit the freefall in financial stocks, the Securities and Exchange Commission (SEC) yesterday enacted a temporary ban on the short-selling of nearly 800 financial stocks. Short-selling is the common practice of betting against a stock by borrowing shares and then selling them in the open market.

A short-seller's hope is the stock will fall; if it does, the stock can be bought back at the lower price. Those cheaper shares can be returned to the lender, allowing the investor to pocket the profits. Traders can lose, however, if the stock rises.

Wall Street observers have disagreed over the extent to which pressure from all those bets that a stock will fall shaped investor sentiment and pressurized some financial stocks, like those of Lehman Brothers last week. Some say the fundamental problems with the financial stocks warranted the pessimism while others say the short selling actively contributed towards the collapse of some financial names.

The SEC move may well be prompting pleas from financial-services companies left off the list, including General Electric Co., American Express Co. and Capital One Financial Corp., all of which have large businesses in the financial sector.

Meanwhile, short-sellers, unhappy at the recent restrictions on their activities, are weighing possible legal action to challenge the ban, though legal experts said it was unclear what chance of success they would have.

Short sellers say that far from causing the current crisis, they've been sounding the alarms about credit market problems for months and should not be blamed for the Wall Street turbulence.

Legal experts say that they would not be surprised if the SEC's move ultimately draws legal challenges. But they say that the 1934 securities law that the SEC drew on to impose the ban gives regulators wide powers and that the commission was clearly trying to quell market turmoil.