Shares of Morgan Stanley returned to positive territory while Goldman Sachs Group Inc. pared some of its earlier losses in a volatile trading session, a day after the Dow Jones Industrial Average sunk to its lowest level in more than two years amid a big selloff in financials.
The reversals came as Dow Jones Industrial Average closed up 410 points, as efforts to reassure investors from Morgan Stanley, the Securities and Exchange Commission and central banks worldwide finally bore some fruit. Also helping the turnaround, CNBC reported that U.S. Treasury Secretary Hank Paulson is considering forming a new state body to specifically address the credit crisis.
Morgan Stanley closed trading up 3.7% to $22.55, after earlier hitting a new 11-year low of $11.70. The stock slid 24% Wednesday amid merger rumors and following a quarterly report that, while far better than analysts' expectations, failed to calm worried investors.
Morgan Stanley is now reportedly in merger talks with Wachovia Corp. and other banks, a sharp turnaround from just a few days ago, when the company defended its independent investment-banking model and vowed it would remain solo.
In addition, Morgan Stanley Chief Executive John Mack was rumored to be discussing the sale of an additional stake in the company through the Chinese government. China Investment Corp. already owns nearly 10% of the firm. Executives have told its more than 8,000 financial advisors to calm clients' concerns, assuring them that their assets are fully segregated from the company's balance sheet.
Goldman, the other remaining large independent brokerage, closed down 5.7% to $108 after earlier tumbling to a four-year low of $85.88. The brokerage's earnings report Tuesday did not beat analysts' expectations as much as Morgan Stanley's did, but Goldman's stock price may not be getting punished as much because it is considered the stronger of the two.
Reversing decreases earlier in the day, both Morgan Stanley's and Goldman's debt-protection costs rose amid renewed concerns. Morgan Stanley's were recently quoted at $920,000 a year to protect $10 million worth of bonds for five years, according to Phoenix Partners Group, up 3.2% from earlier in the day. Goldman's costs, recently increased 11% to $550,000, according to Phoenix.
Traditional banks stayed volatile throughout the day, with many posting gains at the open and later moving into the red before bouncing back again. Bank of America Corp., which had done just that, closed up 12% to $30.58.
Meanwhile, Citigroup Inc., which earlier breached $13 for the first time in 12 years, was closed up 19% to $16.65. Wachovia was up 59% to $14.50 amid the Morgan Stanley rumors and an investment-rating upgrade from Standard & Poor's, which called the bank's stock fairly valued after a 75% tumble this year.
Washington Mutual Inc., which is also looking for a buyer, saw its shares close trading up 49% at $2.99. The savings-and-loan received a critical financial concession from a large investor Wednesday, setting the stage for the thrift beleaguered by mortgage losses to raise more capital or sell the entire company.
General Electric Co. was also volatile. The stock, which fell 6.7% Wednesday to continue recent weakness amid worries about its financial arm, made some gains early Thursday and closed trading up 7.4% at $24.79.
As they fled the stock market Wednesday, investors rushed toward the safe haven of government bonds, long considered the safest of investments. At one point during the day, investors were willing to pay more for one-month Treasury securities than they could expect to get back when the bonds matured. That shows some investors essentially decided that a small but known loss was better than the uncertainty connected to any other type of investment.
Investors say the government takeover of AIG and Lehman's bankruptcy filing are evidence that the situation is grimmer than all but the most pessimistic had expected. Problems have spread from complex debt markets tied directly to the housing market into plain-vanilla corporate bonds.
Some fear that the dwindling ranks of investment banks, coming at a time when commercial banks are pulling back on their own use of capital, will prolong the credit crunch.
Meanwhile, the risk remains that Wall Street's woes will spread to Main Street, as credit tightens for consumers and business. Already, U.S. auto makers have been forced to tighten the terms on their leasing programs, or abandon writing leases themselves altogether, because of problems in their finance units.