Markets Rise On Bailout Hopes

Wall Street UP Arrow graphic AP Graphics

Financial markets grew more upbeat Thursday as congressional leaders said they had struck an agreement in principle on the government's plan to revive the crippled financial system. The Dow Jones industrial average rose nearly 200 points on optimism about the plan, and demand for short-term, safe-haven assets eased slightly as some investors bet that a deal would help unclog credit markets.

Stock market investors clearly were more upbeat after key lawmakers said they would present the plan to the Bush administration and hoped for a vote by both houses of Congress within days. Still, some resistance remained from House Republicans.

According to congressional aides, the plan would release the money in phases, giving the Bush administration just a fraction of the $700 billion it wanted up front. Under the plan, the Treasury secretary would get $250 billion immediately and could have another $100 billion if he certifies it's needed. The last $350 billion could be blocked by a vote of Congress.

The plan is designed to give lawmakers a stronger hand in controlling the unprecedented rescue plan.

The statements out of Washington came after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke urged lawmakers Tuesday and Wednesday to quickly sign off on the $700 billion plan, which they contend would help prop up the economy by removing billions of dollars in risky mortgage-related assets from financial firms' balance sheets. Distrust of the financial companies that hold these assets has led to a seizing up of the credit markets, which in turn threatens the overall economy by making it harder and more expensive for businesses and consumers to borrow money.

Bush highlighted what he sees as the urgency in a national address Wednesday night. Still, White House officials have yielded to a key demand by congressional leaders, agreeing to include widely supported limits on pay packages for executives whose companies benefit from any deal. Major elements are still being worked out, including how to phase in the mammoth cost of the package and whether the government will get an ownership stake in troubled companies.

Alan Lancz, director at investment research group LanczGlobal, said stock market investors are encouraged that a financial rescue is looking more likely than it had earlier in the week. He said the move could help unclog credit markets by allowing banks and investors to place values on assets tied to mortgages.

"How do you establish a floor? Well, this is the bazooka. This is how you establish a floor," he said of the plan's goal of buying up the toxic debt.

Still, some investors had their doubts. Demand eased but remained high for the 3-month Treasury bill, considered the safest short-term investment. Its yield rose to 0.72 percent from 0.49 percent late Wednesday. That means investors are still willing to earn the slimmest of returns in exchange for a safe place to put their money. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.86 percent from 3.81 late Wednesday.

In late afternoon trading, the Dow Jones industrial average rose about 197, to 11,022. The Dow fell 563 points, or 4.95 percent, in the first three sessions this week so Thursday's buying didn't come as a surprise.

Broader stock indicators also rose Thursday. The Standard & Poor's 500 index advanced 23 points to 1,209 and the Nasdaq composite index rose nearly 31 points to 2,186.

Volume on the New York Stock Exchange came to 5.7 billion shares.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude for November delivery rose $2.29 to $108.02 on the New York Mercantile Exchange.

To help ease credit market strains, the Federal Reserve early Thursday issued more than $20 billion in collateral such as Treasury bills in exchange for dollars to help meet demand for safe assets.

Meanwhile, disappointing readings on employment, housing and demand for big-ticket manufactured goods, as well as a sobering forecast from General Electric Co., underscored the difficulties facing the economy.

The Labor Department said the number of people seeking unemployment benefits increased by 32,000 to a seasonally adjusted 493,000 last week - the highest level in seven years and well above analysts' expectations of 445,000. Hurricanes Ike and Gustav added about 50,000 new claims in Louisiana and Texas, the department said.

The Commerce Department said sales of new homes fell sharply in August to the slowest pace in 17 years. The average sales price also fell by the largest amount on record. New homes sales dropped by 11.5 percent in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991.

The department also said orders for expensive manufactured goods sank in August by the largest amount in seven months as demand for both airplanes and cars sank. Durable goods orders fell by 4.5 percent last month, far worse than the 1.6 percent decline that economists expected and the biggest drop since a 4.7 percent fall in January.

GE lowered its forecast for third-quarter and full-year earnings, citing unprecedented weakness and volatility in the financial services markets. The stock, which had declined in the early going, rose $1.50, or 6.1 percent, to $26.09 alongside the broader market.

The Russell 2000 index of smaller companies rose 9.81, or 1.41 percent, to 707.58.

Overseas, Japan's Nikkei stock average fell 0.90 percent. Britain's FTSE 100 rose 1.99 percent, Germany's DAX index added 1.99 percent, and France's CAC-40 jumped 2.73 percent.
  • CBSNews

Comments

Watch CBSN Live

Watch CBS News anytime, anywhere with the new 24/7 digital news network. Stream CBSN live or on demand for FREE on your TV, computer, tablet, or smartphone.