The biggest stock market rallies occur in bear markets. Today we witnessed one of the biggest bear market rallies in history on Plans To Shore Up Banks.

U.S. stocks rallied the most in six years on prospects the government will formulate a "permanent" plan to shore up financial markets, while regulators and pension funds took steps to curb bets against banks and brokerages.

Traders erupted into cheers on the floor of the New York Stock Exchange as the Dow Jones Industrial Average jumped 617 points from its low of the day after Senator Charles Schumer proposed a new agency to pump capital into financial companies. The Standard & Poor's 500 Index climbed 4.3 percent as 68 companies in the gauge rose more than 10 percent.

Traders erupted into cheers on the floor of the New York Stock Exchange as the Dow Jones Industrial Average jumped 617 points from its low of the day after Senator Charles Schumer proposed a new agency to pump capital into financial companies. The Standard & Poor's 500 Index climbed 4.3 percent as 68 companies in the gauge rose more than 10 percent.

Wachovia Corp. soared 59 percent, Citigroup Inc. added 19 percent and Bank of America Corp. jumped 12 percent, sending the KBW Bank Index to its biggest gain since July. Morgan Stanley erased a 46 percent tumble and Goldman Sachs Group Inc. recovered most of a 25 percent slide after the nation's three largest pension funds stopped loaning shares of the brokerages to investors betting on their declines.

The Russell 2000 Index of small-company stocks surged 7 percent, the most since two days after the stock market crash in October 1987.

Wachovia, the fourth-largest U.S. bank, rallied $5.38 to $14.50, its steepest advance since at least 1983. Citigroup, the biggest, jumped $2.62 to $16.65, its largest gain in 10 years. Bank of America, the No. 2, added $3.38 to $30.58. MGIC Investment Corp., the biggest U.S. mortgage insurer, rose 75 percent for its best rally since July.

Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.

"The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution," Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington. "I've been talking to them about it."

Morgan Stanley and Goldman began erasing their declines after the California Public Employees' Retirement System and the New York State Common Retirement Fund joined the California State Teachers Retirement System in deciding to stop lending its shares of the two companies. The decisions curb the supply of shares available to short-sellers.

Morgan Stanley is down almost 45 percent in September. Chief Executive Officer John Mack, in a memo to employees yesterday, blamed short sellers for driving down the price of his company's shares. Morgan may sell a new stake to China Investment Corp., which owns a 9.9 percent position, and is in talks about a possible merger with Wachovia, a person familiar with the matter said.

State Street Corp., the world's biggest money manager for institutions, fell 8.9 percent to $59, paring a drop of as much as 55 percent. Federated Investors Inc., the fourth-largest money-fund manager, fell 11 percent to $27.10 after earlier retreating as much as 44 percent. State Street and Federated issued statements saying that none of their money-market funds had fallen below $1 a share.

It's hard to know where to begin. The stock market is rallying when we we have not even seen the plan. If Schumer gets his way with an "agency to inject funds into financial companies in exchange for equity stakes" there is going to be massive shareholder dilution on top of effective nationalization of banks.

Action in gold was particularly interesting. The reality is the printing presses are going to soar if this plan is carried out, yet gold after blasting to $910 gave nearly every penny of it back as the following chart shows.

Gold Daily Chart

Perhaps gold got ahead of itself, perhaps there is still more unwinding of leverage by gold bulls upcoming. I do not know, and no one else does either. If someone tells you they do know, the odds are that person was calling for gold to hit $1500 and silver to hit $40 earlier this year.

I will repeat my long term conviction: gold is a buy. Shorter term there are still many warning signs. The best thing for gold would actually be a long term consolidation in this area as opposed to another parabolic blast higher. Such blasts are very prone to failures as we have recently seen.

Ran Out Of Time

In Senate Majority Leader Reid: "No One Knows What to Do" I commented on Senator Dodd statement "There is not enough time left in the congressional session for U.S. lawmakers to consider setting up a Resolution Trust Corp-type fund to buy up toxic mortgage assets."

This is what I had to say.

No time To Do Anything

Thank God time ran out. Otherwise Congress would be doing something even though "No One Knows What to Do". Besides, all Congress can do is make any problem it touches worse by trying to fix it.

The biggest problem is that Congress does not even know what the problem is. And unless you know what the problem is you sure as hell can't fix it. Dodd thinks the problem is the "housing foreclosure crisis".

What The Problem Really Is

• The Fed
• Fractional Reserve Lending
• Congressional Meddling In The Free Market
• Congressional Spending
• An Unsound Currency
• An Unsound Banking System

For more on the banking system, inquiring minds may wish to consider You Know The Banking System Is Unsound When.... and Don't Worry, The Banking System Is Sound.

Sadly, I have to take back my proclamation of "No Time To Do Anything" with the following warning: "Never underestimate the ability of Congress to do something completely insane, no matter how little time is left in the session".

Paulson, Bernanke Seek Support for an Agency to Buy Bad Debt

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke will seek support from Congress for an agency to buy bad debt to address the deepening credit crisis, a Democratic lawmaker said.

Paulson and Bernanke will speak with congressional leaders this evening on current market conditions, Treasury spokeswoman Michele Davis said. Lawmakers warned this week the legislative calendar makes it difficult for Congress to act quickly enough to address a plunge in confidence in U.S. financial markets.

Democratic Senators Christopher Dodd and Charles Schumer have said the Federal Reserve, which is getting $200 billion in special funding from the Treasury this month, has the authority to take on a broader role.

"The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution," said Schumer, who today proposed an agency to pump capital into troubled banks. "I've been talking to them about it," Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today.

Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable.

Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would "simply transfer excessive risk to the U.S. government without addressing the plight of homeowners," he said.

An increasing number of lawmakers are advocating a stronger response to the crisis sparked by record homeowner defaults. The turmoil swept Lehman Brothers Holdings Inc. into bankruptcy three days ago and prompted government takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.

Setting up an RTC-type of fund would require an act of Congress. House Majority Leader Steny Hoyer said Sept. 16 a proposal to have the U.S. create an agency to buy distressed debt won't be considered before Congress adjourns ahead of the Nov. 4 elections.

Discussions with the Treasury and Fed focus on "trying to do something more permanent" after the series of government interventions, the New York senator said. For the Fed, "it's hard for them to do monetary policy, which is their primary task, and then run all these businesses," he said.

Fed officials announced an $85 billion takeover of AIG two days ago, hours after leaving their benchmark interest rate unchanged in a decision that rebuffed some investors' calls for a cut.

"There is some preliminary discussions about how to sort of encapsulate and separate the two -- both to keep focus on monetary policy by the main Fed leaders, but also to prevent any conflicts of interest," Schumer said.

"The series of ad-hoc interventions in the market over the past 10 days were important to avoid a systemic disaster," Schumer said. "But we cannot continue to act in such an uncoordinated and ad-hoc fashion."

Under Schumer's RFC plan, "the government would come first," he said. "The government would get repaid before the others in the financial chain."

Government First?

Who believes that? I don't assuming "government" means taxpayers. However, that does not mean shareholders get of scott free either. Still it's hard to comment on a plan that we have not seen yet. However, I can comment on global coordinated panic.

Global Coordinated Panic

• Central Banks Announce Global Coordinated Liquidity Measures
• China, Russia Intervene In Equity Markets
• Britain Bans Short-Selling Citing 'Extreme' Market Climate
• Paulson Seeks Resolution Trust Corporation "Solution"

Every one of those actions was announced today. It is the biggest global panic in history.

That panic is on the heels of ...

• A shotgun wedding between Merrill Lynch and Bank of America
• 3 Month Treasury Yields Effectively Hitting Zero
• The Crime In Buying AIG Time
• A Fed Sponsored Poker Party That Morphed Into "Old Maid".

Futures Soaring

If you are recently short this market you are screwed. S&P futures are +34 (nearly 2.8%) and that is on top of today's rally. It just so happens (and if anyone thinks it is by coincidence they are nuts) that tomorrow is triple witching options expiration.

Q&A

• Is this blatant market manipulation? Of course it is.
• Is the government acting to suppress the price of gold or silver? No, gold and silver is the least of governmental concerns. If you are paying money for any newsletter that claims otherwise, cancel it.
• Can we expect more manipulation? Absolutely, count on it.
• Will this bail out the stock market? No. However, it is a massive transfer of wealth from little guys who are currently short to the market makers.
• Will this rally fail? Yes, but it is a pure guess when. This can be a gap and crap tomorrow or it can last a choppy 3 months.
• Will this solution resolve the fiscal crisis? No, it actually makes it worse.

Weak institutions need to die. It is an enormous waste of capital to prop them up. Instead of wasting money bailing out the likes of Washington Mutual or Wachovia the US could be rebuilding infrastructure instead.

There is over capacity in housing. That overcapacity needs to be annihilated, not added to.

Every proposal above by Congress and Paulson amounts to fiscal insanity. Yet, the stock market is cheering wildly. In my opinion this rally will not hold. However, the rally will hold long enough to destroy any overleveraged bears, especially those in front month options.

This is one of the reasons for an old Wall Street adage that goes something like this: "Bear markets destroy the bulls and bears alike".