Fannie Mae and Freddie Mac led a Wednesday rally in financial stocks after legislators moved closer to approving a bill to let the Treasury Department reduce restrictions on the government-sponsored enterprises.

Congress was expected to approve the housing bill within days, and President Bush said Wednesday that he would sign it into law.

Fannie Mae shares rose 11.9%, and Freddie Mac gained 11.3%.

The KBW Bank Index rose 1.03%; the Standard & Poor's 500 index 0.41%; and the Dow Jones industrial average 0.26%.

Matt Shields, a bank stock trader at Fig Partners LLC, said the inevitability of the housing bill's passage probably coaxed investors to cover their short positions and "chase the rally." Though the legislative action "builds confidence," he also expressed concern that the improvement in bank stocks could lose steam.

"The sector fizzled some in initial trading," he cautioned. "I think the market has maybe gone a little too far, too fast. I think it will start to pull back as soon as earnings are over."

Positive news on the GSEs overshadowed a warning in the Federal Reserve's "Beige Book" that signs of inflation are detectable nationwide, with every central bank district reporting pricing pressures "elevated or increasing." Taking some of the sting out of the report was another decline in oil prices, which at one point fell below $125 a barrel, their first visit to that level in six weeks.

Bank of America Corp.'s shares rose 3.4% after the company said its board had authorized it to spend up to $3.75 billion in the next 12 to 18 months on stock buybacks. The authorization replaces a much-larger, 200 million-share plan that the Charlotte company has barely used given the need to retain capital in the face of loan losses.

Sovereign Bancorp Inc.'s shares rose 8.6% after the Philadelphia thrift company's earnings of 22 cents per share beat the average of analysts' estimates by 6 cents, according to Thomson Reuters. Earnings rose 27.3% from the first quarter but were off 13.6% from a year earlier, at $127.4 million.

Washington Mutual Inc. shares tumbled 20.1% a day after the Seattle thrift reported, after the markets closed, that it had lost $3.33 billion in the second quarter, compared with an $830 million profit a year earlier.

The gainers included Hancock Holding Co. in Gulfport, Miss., up 9.4%, and SunTrust Banks Inc. in Atlanta, 9%.

Wachovia Corp. in Charlotte rose 5.1%. A day earlier the company's shares had soared more than 27% after it reported a net loss of $8.7 billion for the second quarter and again cut its dividend. Some observers said the company's assurance that it has no plan to sell more stock to raise capital may be fueling the gains.

Decliners Wednesday included Trustmark Corp. in Jackson, Miss., off 3.6%; Huntington Bancshares Inc. in Columbus, Ohio, 3.4%; and State Street Corp. in Boston, 3.2%.

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