Stocks End Historic Week With Solid Gains

Updated from 4:12 p.m. EDT

U.S. stocks roared higher Friday following reports that the government was creating a sweeping fix for the financial crisis. A moratorium on short-selling by the Securities and Exchange Commission lent additional support to the rally.

The Dow Jones Industrial Average jumped 368.75 points, or 3.4%, to 11,388.44, and the S&P 500 gained 48.48 points, or 4%, to 1254.99. The Nasdaq added 74.80 points, or 3.4%, to 2273.90.

Despite large daily swings all week, the major indices were mainly unchanged for the week. The Dow was down 0.3%, the S&P 500 was up 0.1% and the Nasdaq tacked on 0.6%.

Financial stocks were off to the races Friday. Names including Washington Mutual ( WM), Wachovia ( WB), Citigroup ( C) and Morgan Stanley ( MS) were all showing sizable double-digit gains.

WaMu finished the day up 42% to $4.25, and Wachovia surged 29% to $18.75. Citi tacked on 24% to $20.65, and Morgan Stanley finished up 21% to $27.21.

Early Friday, the Treasury said it would offer $50 billion from its Exchange Stabilization Fund to insure money-market mutual funds. A number of such funds have lately been under fire thanks to investment in bad debt from bankrupt Lehman Brothers and flailing insurer AIG ( AIG).

The Federal Reserve also said it would build on its liquidity programs to assist money-market funds, by taking steps that include buying short-term debt issued by Fannie Mae ( FNM), Freddie Mac ( FRE) and the Federal Home Loan Banks.

Speaking at a press conference Friday morning, Treasury Secretary Henry Paulson said that government-sponsored entities Fannie Mae and Freddie Mac would continue to buy mortgage-backed securities and support the mortgage market. He also said that the Treasury will expand its program to purchase mortgage-backed securities. He said that the cost of government intervention would reach the hundreds of billions of dollars and the administration would work over the weekend to iron out details of the plan.

Bloomberg reported that Barclays ( BCS) estimated the government would need to borrow an additional $700 billion to $1 trillion to pay for the recent spate of financial-sector bailouts it has undertaken.

"The Treasury's attempt to take the toxic debt instruments off financials' balance sheets is a pretty big step at correcting some of the problems in the credit market," said Robert Pavlik, chief investment officer at Oaktree Asset Management. He said that even after government intervention, the crisis will remain until banks resume lending to one another.

The proposed government entity creates a lot of unknowns, including the pricing of the securities and the extent of resulting writedowns if the government buys them at a discount, said Paul Mendelsohn, chief investment strategist Windham Financial.

The SEC, meanwhile, banned short-selling of 799 financial stocks, effective immediately. The temporary crackdown will remain in place until Oct. 2 but may be extended further. The U.K.'s financial regulator also banned short sales of 29 of its publicly traded companies. Short-selling, or making a bet that a given stock's price will fall, has been a source of heated controversy as some have speculated that short-sellers are responsible for the decline of Bear Stearns and Lehman Brothers.

SEC Chairman Christopher Cox requested that the agency implement a disclosure rule that would require hedge funds and other investors to disclose their short positions.

According to a CNBC report Friday, CIT Group ( CIT) requested that it be added to the SEC's list of financial companies that cannot be sold short. The stock finished up 4.3% at $11.16.

"I don't necessarily like it," said Pavlik of the short-selling ban, "but I think it could help the market." He said that it's not necessarily right for the government to intervene in the markets, but I can understand why it's for the greater good of the economy and the greater good of the public.

Mendelsohn said that the short-selling ban is causing chaos in options and futures markets and disrupting inverse exchange-traded funds and inverse mutual funds. However, he said some short-term panic has been removed. "You don't have the short-sellers reacting to rumors, news or senses of what's going on out there."

The short-selling ban has also offered a backstop against further failures in the financial sector, said Mendelsohn. "When your stock goes from $30, $40 to zero overnight, you can't survive.

"Although it's hurting certain of my positions, this morning was absolutely the correct thing that had to be done here, because yesterday we were in real danger," he said.

The possibility that other ailing firms would merge persisted. Citing people familiar with the situation, The Wall Street Journal reported that Citigroup was considering a buyout offer for Washington Mutual. JPMorgan ( JPM) may also be in the hunt, according to the report. A separate report in the Journal said that Morgan Stanley may join up with Wachovia. JPMorgan jumped 17% to $47.05.

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Elsewhere in the financials space, AIG said Edward Liddy will succeed Robert Willumstad as chairman and CEO. Willumstad was ousted by Treasury Secretary Henry Paulson as part of a government bailout package for AIG.

Shares of AIG climbed on a Journal report that shareholders would try to forestall a government takeover of the company. AIG had previously agreed to hand over 80% of the company to the government in exchange for a loan to keep it afloat. AIG finished the day up 43% to $3.85.

As for earnings, after Thursday's session closed, software maker Oracle ( ORCL) reported rising fiscal first-quarter profits but offered cautious revenue guidance. Shares were up 7% to $20.07.

Mobile-device maker Palm ( PALM), on the other hand, posted a wider first-quarter loss. Palm sank 6.6% to $7.93.

Breadth was bullish. Buyers outpaced sellers by 6-to-1 on the New York Stock Exchange and by 3-to-1 on the Nasdaq. The NYSE said that in the first hour of trading, 1.2 billion shares changed hands, an-all time opening-hour record.

Looking at commodities, oil settled up $6.67 at $104.55 a barrel. Gold gave back $32.30 to settle at $864.70 an ounce after surging more than $110 in the previous two days.

Longer-dated U.S. Treasury securities were plummeting in price. The 10-year was down 2-2/32 to yield 3.79%, and the 30-year was off 3-9/32 points, yielding 4.38%. The dollar was making substantial gains on the yen, but falling vs. the euro and pound.

Overseas, the FTSE in London climbed a dizzying 8.8%, and the DAX in Frankfurt was up 5.6%. Asia stocks went on a tear. The Nikkei in Japan closed with a gain of 3.8%, and the Hang Seng in Hong Kong jumped 9.6%.

Do you agree with the SEC's decision to ban short-selling on financial stocks?

Why didn't they do it sooner?

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