Bank stocks rallied Friday, despite weaker-than-expected data on the job market.

The KBW Bank Index rose 4.83% after falling 4.77% Thursday on preliminary job numbers and weak consumer data. Friday's rally helped the sector post a 4.24% gain for the week.

The broader markets also rose. The Dow Jones industrial average rose 0.29%, while the Standard & Poor's 500 gained 0.42%. Analysts and traders said that short covering fueled the rally.

"Plus, there's a little bit of an optimism that the industry is not staring at a complete abyss in terms of asset quality," said Jeff Davis of First Horizon National Corp.'s FTN Midwest Securities Corp.

Stocks had faltered early in the session after the Labor Department said 84,000 jobs were lost last month. On average economists had predicted a loss of 75,000 jobs. Moreover, the unemployment rate rose to a five-year-high of 6.1%.

Friday's gainers included Downey Financial Corp. in Newport Beach, Calif., which rose 33%, to $3.10, as investors covered shorts, analysts said.

After the market closed Downey disclosed that the Office of Thrift Supervision had issued a cease-and-desist order instructing it to raise capital and build equity this year.

The company also announced the sale of certain real estate assets to a third party (which it did not name) for $110 million. It said it expects to report a net pretax profit of $68 million from the sale. The company said that profit, combined with a dividend from a wholly owned subsidiary, would result in a capital increase of $109 million.

Still, the OTS ordered the struggling thrift company to meet and maintain a minimum Tier 1 capital ratio of 7% and a minimum total risk-based capital ratio of 14%.

Downey must submit a new capital plan to OTS no later than Dec. 31.

Fannie Mae rose 9.66%, and Freddie Mac rose 3.03%. The Wall Street Journal reported that the Treasury Department could announce a plan to infuse them with capital as early as this weekend. The plan would include changes to senior management, sources said.

American Banker has learned that Richard Syron likely would have to step down as Freddie's chairman and chief executive officer as part of a Treasury rescue. The GSE has been searching for a new CEO for more than a year, though it remained unclear Friday whether a successor had been found. Mr. Syron has held both titles since December 2003, despite rulings from regulators that the positions be split.

A Freddie spokeswoman would not discuss the matter.

Comerica Inc. rose 10.6%. Wachovia Corp. climbed 7.8%. Huntington Bancshares Inc. rose 10.5%, and KeyCorp climbed 8.8%.

Bank of America Corp. rose 5.3%. The $1.74 trillion-asset Charlotte company said Friday that it is prepared to settle investigations by federal and state authorities into sales of auction-rate securities.

Shirley Norton, a B of A spokeswoman, said in an e-mail that it is "ready and willing" to reach an agreement with regulators.

At least eight financial services companies have agreed to preliminary settlements to redeem more than $70 billion in securities, according to data compiled by Green Drake Capital Corp.'s Restricted Stock Partners.

The $1.1 billion-asset Columbia Bancorp in The Dalles, Ore., rose most of the day but closed down 0.97%. The company said Friday that it is shuttering its mortgage division and slashing about 18% of its work force in response to the housing slowdown in the Pacific Northwest.

Columbia expects to incur a third-quarter charge of $139,000 related to severance expenses, but over the long term, the job cuts are expected to save the company about $4.2 million annually.

Other decliners included Cascade Bancorp in Bend, Ore., which fell 3.4%, and Appalachian Bancshares Inc. in Ellijay, Ga., which fell 12.9%.

Bridge Capital Holdings fell 12.6%. Late Thursday it announced that it had restated its second-quarter earnings from a gain of $1.6 million to a loss of $1.3 million. The restatement reflects an additional $5 million allowance for credit losses.

In its second-quarter release published July 17, the $810 million-asset Bridge Capital reported an $11.3 million loan-loss allowance, and a $1.2 million provision for credit losses on bad residential construction and development loans.

Susquehanna Bancshares Inc. was down for most of the day but closed up 2.88%. The $13.5 billion-asset Lititz, Pa., company said Friday that it will incur up to $14.5 million of pretax costs this quarter from the unraveling a deal to sell $350 million of vehicle leases and a plan to consolidate its three banks into one charter.

Susquehanna said creating a single Pennsylvania state-chartered bank for its 235 branches would cost $6 million to $8 million but should yield savings next year ranging from $18 million to $20 million. The consolidation should be completed early next month. It also said it expects a $6.5 million charge because it could not sell the leases to a commercial paper conduit controlled by another financial institution.

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