Bank stocks rebounded Tuesday on the heels of Monday's bloody trading session.

As investors digested the ramifications of the Lehman Brothers bankruptcy filing and Merrill Lynch & Co.'s decision to sell itself to Bank of America Corp., the KBW Bank Index soared 7.3%, after falling 8.4% the day earlier.

The Dow Jones industrial average rose 1.3%, and the Standard & Poor's 500 index, 1.7%. They had shed 4.4% and 3.7%, respectively, the previous day.

On Tuesday, Lehman rose 42.8%, to 30 cents a share, after reports that Barclays PLC is set to announce a deal for its U.S. capital markets business. The company's shares had lost more than 94% Monday.

Bank of America rose 11.3%, and Merrill Lynch 30%. Meanwhile, Goldman Sachs Group Inc., one of the two remaining stand-alone U.S. investment banks, fell 1.84% after reporting a 70% drop in profit for its fiscal third quarter.

Also Tuesday, the Federal Reserve Board's policy arm voted to keep interest rates steady, saying that inflation risks outweighed concerns about slowing economic growth as consumer spending falls, credit tightens, and the housing slump persists.

"Investors are starting to pick through the financial sector, looking for the more solid survivors and putting their investments there," said Jack A. Ablin, the chief investment officer at Bank of Montreal's Harris Private Bank in Chicago.

Anthony Conroy, the head trader at Bank of New York Mellon Corp.'s BNY ConvergEx Group, said that investors were picking up bank stocks Tuesday because they see long-term value in many of them.

"Fear and greed dictate short-term" trading, "but earnings and dividends dictate the long term," Mr. Conroy said. "There's tremendous value out there, and that's why we're seeing value investors put some money to work."

Gainers Tuesday also included Washington Mutual Inc., which rose 16% despite a downgrading of its credit rating by Standard & Poor's to "junk" status. The ratings agency cited the Seattle thrift's exposure to deteriorating mortgage loans. Last week, Moody's Investors Service Inc. made a similar move.

Wells Fargo & Co. rose 12.7%. The San Francisco company said late Monday that it would take a noncash charge in the third quarter for its investments in senior unsecured notes and preferred securities issued by Lehman, as a result of Lehman's bankruptcy filing.

Wells did not specify the amount of the charge but said the notes were trading at 25 to 30 cents on the dollar and the preferred securities were trading at less than the $1 par value. Wells estimated that it had about $50 million of unsecured counterparty exposure to Lehman as of Sept. 12 but no direct loan exposure.

Other gainers included JPMorgan Chase & Co., 10.1%; Wachovia Corp., 7.5%; BB&T Corp., 11.2%; Community National Bank of the Lakeway Area in Morristown, Tenn., 27.4%; and First State Financial Corp. in Sarasota, Fla., 24.4%.

Decliners included Northern Trust Corp. in Chicago, off 4.5%; National City Corp., 6.5%; Rodman & Renshaw Capital Group Inc. in New York, 24.3%; and LSB Financial Corp. in Lafayette, Ind., 15.3%.

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