Bank stocks outpaced the broader rally Monday fueled by the improved prospects for an auto bailout and President-elect Barack Obama's plan to rev up infrastructure spending.
The KBW Bank Index rose 5.52%. The Dow Jones industrial average rose 3.46%, topped 9,000 at one point in late-day trading for the first time since Nov. 10. The Standard & Poor's 500 rose 3.84%.
Matthew Shields, a bank stocks trader at FIG Partners LP, said in an interview that the gains showed how investors psychologically crave anything that shows action is being taken, even if tangible results are unclear. "I don't think any of the bankers we are talking to are looking at these moves having a direct impact" in the near term.
Automakers, Congress, and the White House have agreed to some aspects of a bailout, including "emergency loans" and an oversight panel designed to provide at least near-term relief.
The president-elect gave scant details Sunday on his infrastructure spending plan, but observers said evidence that important political figures are taking action is encouraging.
"It helps anytime you take away some uncertainty," Mr. Shields said. "It alleviates stress. This is the volatility of the markets that we will be seeing for quite a while."
Frank Barkocy, the director of research at Mendon Capital Advisors, agreed that evidence of action makes investors comfortable.
"The economy is still deteriorating, and it will be a tough year for financial institutions," he said. "But there is perhaps a little more comfort that there are programs that could work that haven't fully kicked in yet."
The largest banking companies participated in the rally. Bank of America Corp. shares increased 17.1%, Citigroup Inc. rose 9.9%, JPMorgan Chase & Co. rose 9.4%, and Wells Fargo & Co. gained 9.1%.
B of A shares rose even though Gov. Rod Blagojevich of Illinois ordered state agencies to suspend business with the Charlotte company until it restores credit to Republic Windows and Doors. The Chicago manufacturer gained attention last week when displaced workers staged a sit-in demanding benefits; the company has blamed the decision to close its plant on B of A's decision to withdraw funding.
B of A said it had been working with Republic on a solution, though lenders have no power to direct a company's management on "how to manage its affairs and what obligation should be paid." In addition, B of A said Republic "by any objective measure … is unable to operate profitably."
Executive compensation was front and center for investment banks. The Wall Street Journal reported Monday in its print edition that John Thain, Merrill Lynch & Co. Inc.'s chief executive, had been seeking a $10 million bonus for this year. The paper later reported online that Mr. Thain, who is expected to be retained by B of A after it buys the New York investment bank, had withdrawn his request.
John Mack, Morgan Stanley's CEO, sent a memo to employees notifying them the he and two top lieutenants would forgo their bonuses for the second straight year, the Associated Press reported.
Merrill shares rose 17%, and Morgan Stanley rose 3.7%. Goldman Sachs Group Inc. rose 9.1%.
Frontier Financial Corp. shares rose 14.5% after the Everett, Wash., company selected Pat Fahey, a former Wells executive, as its chairman and CEO. Mr. Fahey joined Frontier's board in 2006 after retiring as chairman of regional banking at Wells Fargo Bank.
As the chairman, he succeeded Robert Dickson, who resigned. As the CEO, Mr. Fahey succeeded John Dickson, who became the president of Frontier Bank.