After a roller-coaster session highlighted by a surge in Wachovia Corp. shares and a steep fall for Bank of New York Mellon Corp. and State Street Corp., bank stocks surged in late trading Thursday after reports began to surface that the federal government may create a repository for banks' bad debt.

According to a CNBC report Wednesday afternoon, Treasury Secretary Henry Paulson was "shopping" a proposal to members of Congress to create a facility similar to the Resolution Trust Corp., which was established during the savings and loan crisis of the late 1980s to absorb the assets of failed thrifts.

The market was "definitely rallying on the Paulson rumors," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. He said the hope would be that if the government took the bad assets off the banks' balance sheets, they would start lending again.

The Treasury Department denied that Mr. Paulson had floated such a proposal and said it does not comment on rumors.

The KBW Index had fluctuated throughout the day, as investors weighed the world's central banks moves to restore stability against the likelihood of other major financial companies faltering. But after the latest news about the Treasury Department, the KBW Index rose sharply to close up 13.8%.

The broader markets also fluctuated, but soared late in the day; the Dow Jones industrial average closed up 3.86% and the Standard & Poor's 500 rose 4.29%.

Michael O'Boyle, a bank stock trader at First Horizon National Corp.'s FTN Midwest Securities Corp. in Nashville, said that, though a facility similar to the Resolution Trust Corp. would end up owning those assets, it would demonstrate that "the cleaning process has begun and at least it's a good way to get depositories on the way back."

Mr. O'Boyle said a number of bank stocks were also up during the day, as investors were likely covering shorts in light of Wednesday's ban by the Securities and Exchange Commission of naked short-selling in all publicly traded companies. The ban expanded on one that was in effect from July 21 to Aug. 12.

All the indexes were up early in the day, after the Federal Reserve and some of the world's other central banks announced they would inject as much as $180 billion into money markets to stave off further meltdown in the financial markets. Stocks already have had their two worst days since the Sept. 11 attacks this week; Wednesday's sell-off was prompted by the announcement of a government bailout of American International Group Inc., which rose 31.2% Thursday.

Washington Mutual Inc. rose 48.8% on reports that Wells Fargo & Co. or Citigroup Inc. might be interested in a deal for the thrift company. Wells rose 10.7% and Citigroup Inc. rose 18.7%.

There is growing speculation about merger talks between Morgan Stanley and Wachovia. Morgan Stanley CEO John Mack was also reportedly with China's Citic Group about a possible investment.

Morgan Stanley rose 3.7%, and Wachovia soared 59% on deal rumors, Mr. O'Boyle said. Goldman Sachs fell 5.7%.

State Street's stock plunged more than 40% and Bank of New York Mellon's fell more than 30% in the morning on investor concerns about possible losses in its investment portfolio. But the stock rebounded slightly in the afternoon, closing down 8.9%, after the Boston company issued a press release saying it does not believe it needs to consolidate its conduits; but even if it did consolidate, it said, it would remain well capitalized. The company raised $2.8 billion in equity capital in June.

State Street also said the net asset value of its money market funds has never dropped below $1. The funds do not have an unsecured exposure to American Internatinoal Group Inc., Lehman Brothers, Washington Mutual, Wachovia, Merrill Lynch, or Morgan Stanley.

Other gainers included Bank of America Corp., 12.4%; Regions Financial Corp., 34.3%; Frontier Financial Corp. in Everett, Wash., 50.3%; and Security Bank Corp. in Macon, Ga., 72.4%.

Decliners included Bank of New York Mellon, 4.6%; Berkshire Bancorp Inc. in New York, 38.7%; and FPB Bancorp Inc. in Port St. Lucie, Fla., 20.5%.

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