Bank stocks and the broader market soared Friday to cap one of the financial sector's most volatile weeks in recent memory, one of daily bombshell reports of bankruptcies, mergers, and government intervention.
The KBW Bank Index gained 12.65% to end the week up 16.25%. Thursday and Friday brought the second- and third-biggest one-day gains in the index's 16-year history, trumped by a 17% gain on July 16, when Wells Fargo & Co. reported better-than-expected second-quarter profits and raised its dividend during a bleak earnings period. The week's gains were the best since March 2000
The broader markets also fluctuated widely. The Dow Jones industrial average closed Friday up 3.35%, to end the week down 0.03%. The Standard & Poor's 500 gained 4.01% Friday and 5.19% for the week.
The week's momentous events ranged from the Monday's bankruptcy filing by Lehman Brothers Holdings Inc. to Merrill Lynch & Co. Inc.'s agreement, announced Sunday night, to sell itself to Bank of America Corp.
Later in the week rumors emerged that Morgan Stanley was poised to sell itself, and there was renewed speculation that the Seattle thrift company Washington Mutual Inc. was close to a sale. An extraordinary wave of government intervention, such as Tuesday's bailout of the insurer American International Group Inc., fanned the volatility.
Though the fundamental buildup to this week had been developing for well over a year, the torrid pace of change and the whipsaw action of the markets had even seasoned market watchers scratching their heads.
Richard Bookbinder, a managing member at Bookbinder Capital Management LLC, joked, "For days the world was turned upside down, and now everything is just great. We have bought a little bit of time restoring order to the financial markets … but this industry is far from being on terra firma."
Stephen Carl, a principal and the head of equity trading at Williams Capital Group, said: "It is crazy how all this changed so fast. Who would have thought that all this would happen in such a short period of time? It really is mind-boggling to see all of these former behemoths trading at these prices."
It seems an eternity since Sept. 12, when many of the nation's leading bankers were summoned to the New York Federal Reserve offices and told to come up with ways to ease the financial crisis.
A week later — and a lot of bloodletting later — regulators had announced or were close to announcing several measures. On Friday the Treasury Department was close to unveiling a facility that, like Resolution Trust Corp., formed in the 1980s during the savings and loan crisis, would help banks remove bad real estate debt. The Federal Reserve Board spearheaded a global effort to pump billions of dollars into the financial system, and on Friday it expanded emergency lending and agreed to let commercial banks finance asset-backed paper purchases from money market funds. The Fed also said it would buy short-term debt obligations issued by the Federal Home Loan Bank System, Fannie Mae, and Freddie Mac. On Thursday the Securities and Exchange Commission announced a ban on short-selling in 799 stocks through Oct. 2.
Several companies long viewed as victims of short-selling posted strong gains Friday. Morgan Stanley shares rose 20.7% and Wachovia Corp. gained 29.3%; there was continued chatter that the New York investment bank and the Charlotte banking company could merge. Washington Mutual, which is still believed to be seeking a buyer, rose 42.1%.
It was unclear precisely what impact the short-selling ban is having, as several companies excluded from the list still posted gains. Among them, Fifth Third Bancorp in Cincinnati gained 18.3%, Capital One Financial Corp. in McLean, Va., rose 3.8%; and M&T Bancorp in Buffalo gained 3.8%. AIG shares rebounded 43.1% on reports that some of its largest investors — including former chief executive Maurice Greenberg and several sovereign wealth funds — might attempt to repay the $85 billion loan the U.S. government pledged the insurer under Tuesday's bailout agreement. The goal would be to stop the government from taking over 80% of AIG as stipulated in the bailout agreement.