U.S. Stocks Rally on Government Plan to Buy Stakes in Banks

By Lynn Thomasson

Oct. 14 (Bloomberg) -- U.S. stocks rallied, extending the market's biggest gain since the 1930s, as the government outlined plans to spend $250 billion buying stakes in the nation's banks to shore up confidence.

Citigroup Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc. added more than 14 percent. Exxon Mobil Corp. and Chevron Corp. climbed as oil rose past $84 a barrel on speculation the rescue will be enough to avoid a global recession. European and Asian shares advanced, sending the MSCI World Index to its biggest two-day gain on record.

The government's intervention ``is a huge move and is probably the last roll of the dice,'' said David Hart, a senior equity analyst at London-based investment adviser Fat Prophets U.K. Ltd. ``The authorities now need to let some of these things have a chance to work through the system.''

The Standard & Poor's 500 Index rose 35.02, or 3.5 percent, to 1,038.37 at 9:34 a.m. in New York. The Dow Jones Industrial Average climbed 359.29, or 3.8 percent, to 9,746.9 after a 936- point rally yesterday. The Nasdaq Composite Index increased 46.28, or 2.5 percent, to 1,890.53. About 27 stocks rose for each that fell on the New York Stock Exchange.

The S&P 500 extended its biggest one-day gain since 1939 and the Dow added to its best rally since 1933. The S&P 500 is still down 30 percent in 2008 as losses and writedowns from mortgage-related investments at financial firms worldwide top $635 billion. The S&P 500 was valued at 19 times the earnings of its companies at the start of trading today, 2.5 percent below its average over the past five years.

Cash Injections

Citigroup added 17 percent to $18.48, Merrill Lynch gained 19 percent to $20.94 and Goldman Sachs climbed 14 percent to $126.89.

The three companies are among nine banks to receive half of the $250 billion in exchange for preferred stock, people familiar with the plan said. The other lenders to receive investments are Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp., according to the people.

Paulson urged banks receiving the capital to use it to spur economic growth and not hoard it, while not identifying any of the lenders targeted. President George W. Bush said at the White House that the government's intention is to preserve and ``not take over'' the free market.

`Additional Cushion'

``This move would be big,'' Deutsche Bank AG analysts led by Mike Mayo wrote in a note to clients. ``Banks should gain better debt and equity funding and additional cushion to resolve capital market issues, notwithstanding ongoing and increasingly worse fallout from weakness in the real economy.''

The government's plan to inject cash into financial institutions, coupled with similar actions by countries around the world, may jumpstart the stalled global financial system, Blackstone Group LP Chief Executive Officer Stephen Schwarzman said today at the Super Return Middle East conference in Dubai.

Money-market rates fell on expectations the plans will bolster lending. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans slid 12 basis points to 4.64 percent today, the biggest drop since March 17, according to the British Bankers' Association. It was at 4.82 percent on Oct. 10, the highest level since December.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net;