The markets rallied Wednesday as the heads of the eight major banks in the country were grilled over their use of government bailout money.

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The

Dow Jones Industrial Average

rose 50.65, or 0.64%, to 7,939.53, while the

S&P 500

moved up 6.58, or 0.80%, to 833.74. The

Nasdaq

added 5.77, or 0.38%, to 1,530.50.

The panelists on

CNBC

's "Fast Money" TV show generally liked what they heard from the bank executives before the House Financial Services Committee.

Pete Najarian was particularly impressed with John Mack, the CEO of

Morgan Stanley

(MS) - Get Report

. Najarian said Mack's company is in a great cash position and hasn't used TARP money for dividends and compensation.

Jeff Terranova said the same can be said of

Goldman Sachs

(GS) - Get Report

which has written down assets to levels that they can recover from.

Guy Adami noted the credit markets are improving without the government's help. As of January 2009, $78 billion of investment grade bonds were sold by companies that weren't helped by the government, he said.

Dylan Ratigan, the moderator of the show, asked Gerard Cassidy, a banking analyst with RBC Capital Markets, for his observations of the testimony.

Cassidy said he believes the capital markets business will improve before the credit lending business. In addition, he said all the major banks will need more equity capital, adding it will be interesting to see how they will fare with the proposed stress test in the second round of TARP funds.

According to Cassidy, bank stocks will go higher if the metrics in the stress test are based upon "realistic assumptions" and if the banks pass the test.

Cassidy said the problem with the toxic assets has to do with both the illiquidity of the assets, i.e. the fact that there are no bids for them, and actual credit losses. "It's about 50-50," he said.

Terranova asked Cassidy whether Morgan Stanley and Goldman stand out because they are not tethered to the consumer side of the business, which Terranova said has been battered by growing unemployment and contracting GDP.

Cassidy agreed but he also noted his concerns about the growing problems in commercial real estate this year.

He also agreed with Ratigan's trading strategy to short commercial real estate and buy capital market names like Goldman and Morgan Stanley.

Cassidy said he's would go long on residential real estate in Southern California, as he senses a bottom developing in that market.

And he said regional banks have been hurt by the over exposure to real estate and construction loans.

Joe Lavorna, chief economist for Deutsche Bank, said capital constraints remain the central problem for banks. He said it is difficult for them to raise capital when their stocks are in single digits.

As for the proposed public-private equity partnership to handle toxic assets envisioned in the Geithner plan, Lavorna said private investors are afraid to come in and buy the assets in a situation where they believe government may change the rules.

The economist told the panelists that he "hated to say it" but he thinks it would better to "bite the bullet" and go through with nationalization.

Lavorna said the sad state of the economy makes him leery of investing in financial stocks, even Morgan Stanley and Goldman Sachs.

Ratigan shifted the discussion to what was working in the markets on Wednesday. Gold remain a favorite of investors, rising 3% to $943.80. Terranova said gold has become the currency of last resort. Seymour added the entire precious metal group is doing well, especially platinum.

Najarian said the health care sector continues to perform well. He said he was encouraged by how well

Bristol-Myers Squibb

(BMY) - Get Report

did in its IPO, noting the company added 5 million shares to the 30-million-share offering.

Adami, who likes

Amgen

(AMGN) - Get Report

, said there's a lot of money in the sector and a lot of money longing to be spent on acquisitions.

Ratigan shifted the attention to housing and a dismal report showing the continuing decline in housing prices. Terranova said he would go with

Weyerhaeuser

(WY) - Get Report

when the market turns.

Seymour said he would get involved with home builders with the best balance sheets because the consumer tax credits in the Geithner plan could stimulate demand for new construction. Najarian said he liked

Freeport McMoRan

(FCX) - Get Report

as a trade because of the use of copper in pipes for home construction.

In the final trades, Seymour liked

Turkcell

(TKC) - Get Report

(TEXT)

. Adami favored Amgen. Terranova picked

IBM

(IBM) - Get Report

. And Najarian liked

SPDR S&P Biotech

(XBI) - Get Report

.

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"'Fast Money'Portfolios of the Week" on Stockpickr every Thursday.