Stocks soared back to close sharply higher as progress continued toward resurrecting the Resolution Trust Corporation to dispose of bad bank assets and after regulators in the US and Europe took aim at short sellers.
The Dow Jones Industrial Average hurdled to a nearly 400-point gain after whipsawing between positive and negative numbers for most of the day, while the S&P and Nasdaq notched even higher percentage gains.
CNBC learned that a move is afoot in the Treasury to put the RTC back in business. The entity was created in 1989 amid the savings and loan crisis and liquidated assets of those institutions until it was folded into the Federal Deposit Insurance Corp in 1995.
Such a move, according to its advocates, would allow banks to shovel bad debt off their balance sheets and send them back to business as usual. In turn, that could allow the housing market to recover because it would restore banks willingness to lend.
"This will bring real trust back into the market." Donald Marron, chairman of Lightyear Capital, said on CNBC. "It would free up real, spendable capital in these organizations. They can use that to make loans, to make transactions and to build confidence in the system. This is a confidence crisis."
The Dow surged more than 200 points as trading headed into the final hour, using the RTC news reported on CNBC to build on an earlier move up on the short-selling news. The Treasury would neither confirm nor deny the report.
On the short-selling front, a major pension fund said it would no longer loan out shares of banker-brokers Goldman Sachs and Morgan Stanley to short-sellers, while Britain's Financial Services Authority banned short-selling in financial stocks until Jan. 16.
CalPERS, the California Public Employees Retirement System, made the stunning announcement during early-afternoon trading. It sent bank stocks sharply higher and helped rejuvenate a rally after central banks shot liquidity into the system and cheered investors.
"It's definitely going to scare the short sellers and force a lot of them to cover," said Dave Rovelli, managing director of US equities for Boston-based Canaccord Adams. "It's like a snowball effect."
Also, under a measure by the Securities and Exchange Commission that took effect today, short sellers and their broker dealers must deliver securities by the close of business on the settlement date, three days after the sale.
The SEC is under pressure to further curb short selling, which involves borrowing stocks and selling them to a third party with an agreement to buy them back later in hopes that the price will fall.
At the same time, Morgan Stanley shares were getting crushed amid investor uncertainty about the Wall Street titan's future as it negotiates a merger with Wachovia . Bank of New York and other custody banks also tumbled over concerns about money market funds.
Elsewhere in the market, Google helped put a floor beneath the Nasdaq's losses. But the tech index was hampered after Apple suddenly turned negative.
Bank stocks started strong as a new Securities and Exchange Commission rule took effect regarding naked short selling of all stocks. Investment banker UBS surged, as did commercial giant Washington Mutual, which reportedly has put itself up for auction.
At the same time, though, investors looked negatively on a possible merger between Morgan Stanley and Wachovia.
CNBC's panel of experts breaks down the financial crisis in video at left.
CNBC reported that Morgan -- one of the two last independent, U.S.-based investment banks -- is in serious negotiations with Wachovia. Morgan shares opened sharply lower, recovered after a half-hour of active trading, then turned negative again on heavy volume.
The talks with Wachovia follow preliminary discusses that began earlier this week and are going on even as Morgan continues to discuss raising capital from a Chinese bank. Some doubted the two would be a good match.
"The market hates uncertainty and Morgan Stanley is an uncertain situation," said Alan Lancz, president of Alan B. Lancz & Associates, an investment advisory firm, based in Toledo, Ohio. "You're not going to have the market moving up anything significant with that uncertainty around."
One positive in the sector came after central banks worldwide said they would prop up money markets by adding billions in cash.
The Fed said it would authorize a $180 billion expansion of temporary foreign currency swap arrangements.
Finally, battered insurer American International Group, the beneficiary of a controversial $85 billion federal rescue plan, will be removed from the Dow 30 bluechip index on Sept. 22 and be replaced by Kraft Foods.
GM Helps Dow, Commodities Rise
AIG led Dow gainers in its final days on the index, while General Motors was the highest of the non-financial bluechips as investors swarmed in to bargain-hunt.
All 30 Dow components were higher. Market breadth overall was strongly positive, with gainers beating losers more than 2 to 1 as 1.8 billion shares changed hands.
Energy and financial services companies were the hot tickets on the S&P, with Occidental Petroleum among the top gainers.
Some commodities rallied on the chaos in the equities markets.
Oil surged nearly $4 to pass the $100 a barrel markbut lost ground as the day went on, while gold continued its push higher, roaring past $900 an ounce after a record-breaking day Wednesday.
And in earnings news, ConAgraposted a higher-than-expected quarterly profit Thursday, but cut its full-year outlook, citing inflation and higher investments for some of its brands.
FedExreported quarterly profit in line with estimates, but said earnings had been hurt by challenging global economic conditions and high fuel prices.
In economic news,jobless claims gained more than expected, to 455,000, as the employment fallout from Hurricane Gustav began to show up in the economic reports. Other economic indicators offered conflicting news; leading indicators fell a greater-than-expected 0.5 percent, but the Philadelphia Fed manufacturing index hit 3.8, its first positive reading since November 2007.