Stocks Surge as Bulls Roar in Late-Day Rally

Updated from 2:33 p.m. EDT

Into the final hour of trading Thursday, stocks in New York rallied strongly following reports that the government may jump in to take on many of the securities at the core of the credit crisis.

The Dow Jones Industrial Average shot up 358 points to 10,967, and the S&P 500 was better by 40 points at 1197. The Nasdaq was up 79 points to 2178.

The sharp move to the upside accompanied a report from CNBC that Treasury Secretary Henry Paulson was in discussions to initiate a Resolution Trust-like solution to the credit crisis. Following the Savings and Loan crisis in the late 1980s, the government created the trust to manage mortgage-related assets owned by defunct banks.

On Wednesday, stocks took a severe beating following the government bailout of insurance firm AIG (AIG Quote), which reminded investors of the severity and scope of the credit crisis. Pessimism on Wall Street was ramping in the wake of the AIG bailout, a bankruptcy for Lehman Brothers (LEH Quote) and a last-minute merger between Merrill Lynch (MER Quote) and Bank of America (BAC Quote).

Ahead of the latest session, more news emerged from the struggling financials space. Washington Mutual (WM Quote) hired Goldman Sachs (GS Quote) to help it prepare for a sale, while private equity firm TPG had helped clear the way for a merger by waiving an anti-dilution clause that would make WaMu pay for any dilution related to a capital raise or buyout.

Meanwhile, The New York Times and other news outlets reported that Morgan Stanley (MS Quote) was in discussions to merge with Wachovia (WB Quote). The Government of Singapore Investment Corp. said it would take a stake in Morgan if approached, and CNBC reported that HSBC (HBC Quote) and China's CITIC Group were also interested. On Wednesday, Morgan Stanley and Goldman Sachs shares both faced pressure as investors wondered if any firm was safe on its own.