Financial stocks led a market rally Monday after Washington threw Citigroup Inc. a $20 billion life preserver, averting a bank collapse that could have further hampered the global financial system.
The KBW Bank Index rose 17.7% as Citi, one of its components, rose 57.8%, to $5.95 a share, on news that the Treasury would also guarantee $306 billion dollars of its assets and pump an additional $20 billion in capital into the company.
The Dow Jones Industrial Average rose 4.93% Monday.
In a statement issued just before midnight Sunday, the Treasury said, "The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth."
Joseph Morrissey, a bank-stock trader at Boenning & Scattergood Inc., said in an interview Monday that the Citi announcement "brought clarity to the market."
"Citi epitomized that the market never drifts up when there are questions about what is going on within an organization or a sector," he said. "The government couldn't let Citi fail. It has a strong place within the market, and this all makes sense."
Traders said that the encouraging words from the Treasury spurred a surge of investing in big-bank stocks. Bank of America Corp.'s stock rose 27.2%, to $14.59; JPMorgan Chase & Co. was up 21.3%, to $27.58; and Wells Fargo & Co. climbed 15.9%, to $25.22.
"People are taking comfort in the notion, from the comments from [President] Bush and the Treasury, that they will do anything necessary to save these companies that are too big to fail," said Matthew Shields, a trader at FIG Partners LLC. "This is really breathing some optimism into the bank stocks and the broader market."
U.S. Bancorp's stock rose 11.4%, to $25.10, after the Minneapolis banking company's announcement Friday that it had taken over two failing Southern California banking companies, Downey Savings and Loan Association and PFF Bank and Trust. The Federal Deposit Insurance Corp. handled the deal, ensuring that both banks — and their combined 213 branches statewide — reopened as U.S. Bank offices on Saturday.
Mr. Morrissey said U.S. Bancorp can attribute its strong performance Monday to "Citi's announcement more than anything else."
"Nothing else was really a market-moving event today," he said. "Citi's news really overshadowed anything else in the financial sector."
Most big-bank stocks delivered strong performances Monday, including PNC Financial Services Group Inc., up 11.1%, to $48.55, after suffering through a difficult past week.
Mr. Morrissey said he would be "disappointed" if the market was unable to maintain its rally through this week.
For the longer term, Mr. Shields said, Monday's rally may have no meaningful impact, but "so far, so good; things are holding up."
Existing-home sales resumed falling in October, and the median house price suffered its largest drop on record.
Home resales declined 3.1%, to a 4.98 million annual rate, from the month earlier — and 1.6% from a year earlier, the National Association of Realtors said Monday. The median home price fell 11.3%, to $183,300 in October, from a year earlier. This was the lowest median since $183,200 in March 2004.