A very volatile day for the markets today, ultimately ending on a positive note driven by news that the government may create an entity that will take over banks’ bad debt. Treasury Secretary Henry Paulson is considering the creation of an entity like the Resolution Trust Corp. that was created during the savings and loan crisis in the late 1980s and early 1990s. A federal intervention could allow financial institutions to rid themselves of mortgage debt and relieve the drain on capital which caused the downfall of both Lehman Brothers and Bear Sterns.

The news boosted the major indices, which saw their share of ups and downs during today’s session. The Dow Jones Industrial average [[^DJI]] rose 410.03 points, or 3.86% to close at 11,019.69, gaining back some of yesterday’s losses. The Nasdaq [[^IXIC]] rose 100.25 points to close at 2,199.10 up 4.78% on the day. The S&P500 (SPY) closed the day at 1,206.51, up 4.33% or 50.12 points from yesterday. The 10 year Treasury note rose 79 basis points to 3.44%. The Dollar took a hit against the Euro today, and fell to 0.6969 vs. the Euro but gained slightly against the Yen, and is currently trading at 105.33 vs. the Yen. Crude oil rose slightly to $98.27 per barrel, gaining $1.11 or 1.14%, but still trading below OPEC’s $100 mark. Gold also gained on the day, up $4.30 or 0.51% to $850.90 per ounce as some traders sought stability in the commodities market over the past few days.

Morgan Stanley (MS) scrambled to close what could be the biggest Wall Street realignment deal since 1930 with Washington Mutual (WM). Investment banks, Merrill Lynch (MER), Bear Stearns and Lehman Brothers have all lost their independence, and many fear that our current crisis will bring similar fates to the remaining financial institutions. Both firms, Morgan Stanley and WaMu are in need of capital and there have been many rumors circulated throughout Wall Street about possible suitors. This deal would be monumental if terms can be drawn up, so we will have to wait and see what comes out of these stories. Headlines could be made as early as tonight.

New York’s Attorney General, Andrew Cuomo, said that the state of New York has begun an investigation of possible illegal short selling in stocks of some Wall Street firms like Goldman Sachs (GS), Morgan Stanley, AIG (AIG), Lehman Brothers, and two other Wall Street firms caught in the middle of our current financial crisis. Cuomo said, “this investigation will not only encompass short-selling of Lehman Brothers and AIG but also short-selling in other companies that may be occurring, like Morgan Stanley and Goldman Sachs,” and that “[his] office will investigate and prosecute short-sellers who spread bad information and false rumors and who conspire to bring down a company’s stock price or who engage in other manipulative and fraudulent conduct.” The New York Attorney General feels that the SEC should freeze short-selling of financial sector stocks on a temporary basis, while the matter can still be investigated. This will stop further demise of these companies’ share prices. It will be interesting to see what move, if any, the SEC makes. UK securities regulators have already imposed a ban on the short-selling of financial-sector stocks to help stabilize the market, which will last until January 16.

The Federal Reserve along with the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank joined together to inject as much as $180 billion into money markets to try and ward off the growing global financial crisis. The Fed has authorized a $180 billion expansion of reciprocal currency arrangements with the other central banks, including up to $110 billion by the ECB, up to $27 billion by the Swiss National Bank, as much as $60 billion by the Bank of Japan, $40 billion by the Bank of England and $10 billion by the Bank of Canada.

Disclosure: The author that the mutual fund is a part of is long GS.