Badly beaten bank stocks were catapulted higher yesterday following news that the government was close to unveiling a sweeping rescue plan for the financial sector.

The nation's leading investment banks-Morgan Stanley and Goldman Sachs which were the focus of much of the market's attention a day earlier, surged just after the opening, gaining 23 per cent and 29 per cent respectively.

Other large financial institutions that have grabbed headlines lately, including Wachovia, which has reportedly been in deal talks with Morgan Stanley, gained 34 per cent.

Fellow rumoured buyout target Washington Mutual jumped by 33 per cent, while other key industry players such as Citigroup rose nearly 26 per cent.

Shares of both Merrill Lynch and Bank of America, which announced a merger on Monday worth roughly US$50 billion, each gained 21 per cent.

Overall, the Dow Jones industrial average was up close to 400 points, or 3.5 per cent, while the tech-heavy Nasdaq and the broader S&P 500 each gained more than 4 per cent.

Financial stocks have been on a roller coaster ride this week. Monday's decision by Lehman Brothers to file for bankruptcy and broader fears about the fate of the industry sent stocks across the sector plummeting for most of the week.

But talk of a potential long-term government solution to the credit crunch which surfaced late Thursday helped financials stage an impressive rebound.

Such a program, which could allow banks to rid themselves of the troubled mortgage-related assets that have plagued their balance sheets, seemed increasingly certain after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with top lawmakers Thursday evening to discuss the plan.

Also fueling the rally was yesterday's announcement by the Securities and Exchange Commission to temporarily ban the short selling of 799 financial companies.

Short sellers borrow stock with the aim of selling it, then buying it back at a lower price, hoping to pocket the difference.

The commission said short sellers add liquidity to the markets during normal conditions, but recent unbridled short-selling has contributed to the recent tailspin in the stock market, especially in financial stocks.

(The New York Times)