Stock prices surged today, with the Dow Jones industrial average up almost 500 points, after the U.S. Treasury unveiled its highly anticipated plan to unclog the balance sheets of banks struggling under the weight of toxic mortgage-related debt.
Following on the heels of gains in overseas markets, the Dow closed up 497.48 points, or 6.84%, at 7,775.86; the S&P 500 index rose 54.38 points, or 7.08%, to 822.92; and the Nasdaq composite ended up 98.50 points, or 6.76%, at 1,555.77. All numbers are preliminary.
Investor sentiment was buoyed by a report from the National Association of Realtors that sales of previously owned homes rose 5.1% in February from the prior month, the biggest one-month gain since July 2003. Economists had forecast a drop in sales. Compared with February 2008, sales were down 4.6%.
Financial stocks led the rally. Citigroup, Bank of America and Wells Fargo each rose about 20%.
Earlier, the Treasury announced its plan, dubbed the Public-Private Investment Program, which envisions combining $75 billion to $100 billion in capital from its Troubled Asset Relief Program with capital from private investors including hedge funds, pension funds and insurance companies to generate $500 billion in purchasing power. That money will be used to purchase what the Treasury, in a news release announcing the plan, called legacy assets. The capital base could be expanded to $1 trillion, the Treasury said.
According to the news release: The financial system is still working against economic recovery. One major reason is the problem of legacy assets both real estate loans held directly on the books of banks (legacy loans) and securities backed by loan portfolios (legacy securities). These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.
(Click here to view the Treasurys news release on the program.)