Market strain eased by prospect of a bank debt repository

by Tina Kells | September 18, 2008 at 12:09 pm

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The troubled United States financial markets were given hope Thursday, by suggestions that the federal government may set up a repository for bad bank debt. The Dow Jones industrial average increased by 400 points on the news.

Wall Street surged higher Thursday, with the Dow Jones industrials up more than 400 points after a report that the federal government is considering creation of a repository for banks' bad debt.

CNBC said Treasury Secretary Henry Paulson is considering creation of an entity like the Resolution Trust Corp. that was formed after the failure of savings and loan banks in the 1980s.

Investors were cheered by the notion of a huge federal intervention like the establishment of RTC to acquire the real estate debt that has hobbled financial institutions and led to the intense volatility in the markets this week.

If there's an RTC-like entity, "it's going to take a lot of the bad debt off the balance sheets of these companies," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. That would alleviate many of the pressures causing the credit crisis, he said, and open up the credit markets again.

However, Fullman added, "the devil's in the details."