Reports that a foreign company might be interested in buying Lehman Brothers helped deflect ominous rhetoric from Federal Reserve Board Chairman Ben Bernanke and gave the banking sector a lift Friday.
Lehman's shares rose 5%. Reuters reported that Korea Development Bank had discussed bidding on a portion of the New York investment bank but could not reach an agreement over the price. A spokesman for Korea Development later told Bloomberg News that it was "considering all kinds of options, including Lehman."
The shares had been up more during the trading session.
The KBW Bank Index rose 3.16% for the day and 0.72% for the week. The Standard & Poor's 500 gained 1.13% for the day and 1.06% for the week. The Dow Jones industrial average rose 1.73% for the day but fell 0.27% for the week.
Matt Shields, a bank stock trader at FIG Partners LLC, said in an interview that the buzz over a possible white knight for Lehman gave financial stocks a much-needed early lift that never fully dissipated.
"It really helped to spread things around in the morning," Mr. Shields said.
Mr. Bernanke's remarks during a speech in Jackson Hole, Wyo., may have tempered some of the Lehman-inspired enthusiasm. He said higher inflation and the financial crisis present significant challenges to restoring stability.
"Although we have seen improved functioning in some markets, the financial storm that reached gale force" a year earlier "has not yet subsided," he said. "Its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment."
Fannie Mae rose 3.1% Friday, and Freddie Mac fell 11.1%, on mixed news about the government-sponsored enterprises.
Moody's Investors Service Inc. downgraded their preferred shares to Baa3, or one notch above junk status, and Warren Buffett told CNBC that he saw a "reasonable chance" that Fannie and Freddie would not survive a government bailout. But Reuters, citing an unnamed source familiar with the discussions, reported that the Treasury Department is still looking at ways to salvage the GSEs as shareholder-owned enterprises.
Citigroup Inc. rose 3.8%. The Wall Street Journal reported online that the New York company plans to reorganize its capital markets business along both geographical and business-line divisions.
Other gainers included KeyCorp, which gained 8.9%; PacWest Bancorp in San Diego, which gained 7.7%; and SunTrust Banks Inc., which gained 5.9%.
Decliners included Wachovia Corp., which fell 2%; Washington Mutual Inc., which fell 1.8%; and 1st Source Corp. in South Bend, Ind., which fell 0.6%.