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.