Wall Street rallies on bailout revival hopes

NEW YORK - Wall Street roared back on Tuesday, a day after its worst sell-off in 21 years as investors bet Washington would revive a plan to stabilise the US financial sector following its surprising defeat on Monday on Capitol Hill.

Adding to the positive tone was a Reuters report that US regulators intend to provide new accounting guidelines that could slow the heavy flow of mortgage-related losses on banks' balance sheets. The Dow jumped 485 points after posting a one-day record loss of 778 points on Monday.

Strains persisted in credit markets, however, suggesting banks remain reluctant to lend to each other, and September marked the benchmark S&P 500's worst month in six years.

But investors were feeling more optimistic after President George W. Bush and congressional leaders pledged to continue talks on a US$700 billion financial-sector rescue plan.

The S&P 500 rose more than 5 per cent, recovering more than half of the losses booked on Monday when the House of Representatives rejected the plan, which would have let the US Treasury buy bad mortgage debt from stressed banks so they can resume lending.

Tuesday's climb marked the S&P's best one-day percentage gain since July 2002.

Under current rules, banks must value assets based on what they would fetch in a current market transaction. Since prices for mortgage-related assets have long been at distressed levels, banks have been forced to scurry for more capital.

The Dow Jones industrial average rallied 485.21 points, or 4.68 per cent, to 10,850.66. The Standard & Poor's 500 Index jumped 58.35 points, or 5.27 per cent, to 1,164.74. The Nasdaq Composite Index climbed 98.60 points, or 4.97 per cent, to 2,082.33.

For the month of September, the Dow fell 6 per cent - its worst month since June. Tuesday also marked the end of the third quarter, when the Dow fell 4.4 per cent. This was the Dow's worst quarter since the second quarter of this year.

This is the Dow's longest quarterly losing streak since 1977-1978.

Source: Singapore Business Times - 01 Oct 2008