Wall Street likes bailout plan

Posted September 19, 2008 10:17 a.m. EDT
Updated September 19, 2008 11:14 p.m. EDT

Wall Street extended a huge rally Friday as 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, and Treasurys fell as money flowed into equities.

Treasury Secretary Henry Paulson, speaking about the rescue plan said a bold approach is needed to remove troubled assets from the books of financial firms. Paulson said he plans to work through the weekend with congressional leaders to reach agreement on a plan that would address the root problems of the financial crisis.

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 had grinded to a virtual standstill in the wake of this week's bankruptcy of Lehman Brothers Holdings Inc. and the bailout of teetering insurer American International Group Inc.

Michael Walden, an economist at North Carolina State University, said he likes the plan Paulson outlined.

"The Paulson plan will be very helpful," he told WRAL News. "In essence, the government will be buying low-value, risky assets with the hope of eventually selling them later when markets are calmer and stronger. This plan worked rather well 20 years ago with savings and loan institutions."

Chris Dodd, chairman of the Senate Banking Committee said the government's financial rescue plan will be costly.

Dodd told reporters, "We're anxious to hear the specifics. None of us have any idea what the details are. We understand the gravity of the moment."

Republicans and Democrats on Dodd's panel met at the Capitol and emerged vowing to put politics aside and develop a solution to the financial crisis. Dodd is a Democrat from Connecticut.

President Bush also spoke Friday, saying, "This is no time for partisanship. We need to move urgently needed legislation as quickly as possible without adding controversial provisions that could delay action."

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.

"If people get worried that those aren't safe," Walden said, "that could create this decline in confidence in the banking system."

Walden cautioned that the core of the crisis still lies with the housing market. "The thing we have to really see better is the housing market," he said. " We need to see sales go up. We need to see buying go up and we need to see prices stabilize."

The Fed will also buy short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

The Dow Jones industrials were more than 400 points by noon Friday.

To help limit the freefall in financial stocks, the Securities and Exchange Commission 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.

"This needs to be big enough to make a real difference and get to the heart of the problem," Paulson said of the plan.

Paulson said that the new troubled-asset relief program that he wants Congress to enact must be large enough to have the necessary effect while protecting taxpayers as much as possible.

"I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said.

"The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing," Paulson said.