If a plan is put in place to help the banking industry, it could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has grinded to a virtual standstill in the wake of the bankruptcy of Lehman Brothers Holdings Inc.
The government made some other big moves on Friday to prop up the stock market.
To help limit the freefall in financial stocks, the Securities and Exchange Commission announced it is temporarily banning the short-selling of nearly 800 financial stocks. Short-selling is the common practice of betting against company stocks by borrowing its shares, selling them, and pocketing the difference when they fall.
The Federal Reserve said Friday it will expand its emergency lending and let commercial banks finance purchases of asset-backed paper from money market funds. The Fed will also buy short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
And to help calm investors' anxieties, the Treasury Department has decided to use a Depression-era fund to provide guarantees for U.S. money market mutual funds. Money market mutual funds are typically considered safe, but many investors have been fleeing them due to worries about the funds' exposure to the embattled financial industry.
Ahead of the market's open Friday, Dow Jones industrial futures rose 553, or 5.04 percent, to 11,535. Standard & Poor's 500 index futures rose 64.80, or 5.39 percent, to 1,268.00. Nasdaq 100 index futures rose 69.50, or 4.07 percent, to 1,778.00.
Overseas stock markets soared.
Japan's Nikkei stock average jumped 3.8 percent, and Hong Kong's Hang Seng index surged 9.61 percent. In Europe, Britain's FTSE 100 was up 8.20 percent, Germany's DAX index was up 5.58 percent, and France's CAC-40 was up 8.06 percent.
In early trading Friday, Treasury prices dropped. The yield on the 3-month Treasury bill - a safe investment to which investors have rushed - rose to 0.98 percent from 0.07 percent late Thursday. Yields move opposite price. The yield on the benchmark 10-year Treasury note shot up to 3.79 percent from 3.53 percent late Thursday.
On Thursday, the Fed and other major central banks around the world joined forces to inject as much as $180 billion into global money markets in an attempt to keep the credit crisis from worsening. But with worries swirling about the financial health of such major companies as as thrift bank Washington Mutual Inc. and investment bank Morgan Stanley, the cash infusion was not enough to alleviate the tension on Wall Street.
An afternoon report, however, that the government was in the midst of crafting a plan to assume banks' bad debt led to a late-day surge in stocks. The Dow rose 410.03, or 3.86 percent, to 11,019.69, in the biggest percentage point gain since October 2002. The index is still down about 400 points for the week.
"If a solid plan is put in place, it's definitely going to be a positive in easing the pain," said Stephen Carl, principal and head of equity trading at The Williams Capital Group. He added, though, that "it depends on how it's structured."
Wall Street's whipsaw week saw a massive loss Monday, a rebound on Tuesday, another drop Wednesday, and the rally on Thursday.
The dollar rose against most other major currencies in Friday trading. Gold prices fell.
Light, sweet crude for October delivery rose $4.28 to $102.16 a barrel in premarket electronic trading on the New York Mercantile Exchange.
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