NEW YORK - Wall Street rallied in a stunning late-session turnaround Thursday, shooting higher and hurtling the Dow Jones industrials up more than 400 points following a report that the federal government might create an entity to absorb banks' bad debt. The report also cooled investors' fervor for safe investments like government debt that were in demand for much of the day.
The report that Treasury Secretary Henry Paulson is considering the formation of a vehicle like the Resolution Trust Corp. that was set up during the savings and loan crisis of the late 1980s and early 1990s left previously solemn investors ebullient. The resolution trust would also require Congressional legislation which could take months.
Wall Street hoped a huge federal intervention could help financial institutions jettison bad mortgage debt and stop the drain on capital that has already taken down companies including Bear Stearns Cos. and Lehman Brothers Holdings Inc.
Worries about financial landmines on companies' books have essentially crippled parts of the world's financial markets in recent days and led to the intense volatility in the markets this week.
"It's going to take a lot of the bad debt off the balance sheets of these companies," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York, commenting on the possibilities of an entity akin to the RTC. It could alleviate many of the pressures causing the credit crisis, he said, and reopen moribund credit markets. But Fullman noted, "the devil's in the details."