Banks, Wall Street firms lead stock charge

NEW YORK (CNNMoney.com) -- Financial services firms led the charge in stock gains early Friday following the surprise move by the Federal Reserve to cut its discount rate.

The central bank left its benchmark fed funds rate unchanged but cut the discount rate, which is what Federal Reserve banks across the country charge qualified lenders - mainly banks - for temporary loans. It is largely symbolic.

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The Fed will now also let banks borrow for as long as 30 days, and renew such borrowings. The Fed said the changes will remain until market liquidity improves "materially," according to Reuters.

The move calmed fears about a meltdown in global credit markets that have been rocking stocks around the world, particularly shares at many leading U.S. finance firms, although a half-hour after trading started, all had retreated a bit from earlier highs.

Investors said the lower borrowing costs would help ease worries of illiquidity, and perhaps help banks shore up lending margins and profitability, Reuters reported.

"Can banks make more money when the Fed lowers rates?" Adam Compton, co-head of global financial research at RCM Global Investors in San Francisco, which invests $150 billion, said to Reuters. "Very large banks have been having flat to lower net interest income because you can't really make a good spread. That will change."

Moody's Investors Service said Friday its does not see does widespread rating downgrades for the world's banks due to current market conditions, according to Reuters.

The research firm said that third-quarter earnings will likely decline for a number of banks, but only small amount of banks could be downgraded, the news agency reported.

Countrywide Financial (Charts, Fortune 500), the nation's leading mortgage lender whose problems accessing the debt markets had sparked widespread selling both Wednesday and most of the trading day Thursday, saw its shares soar nearly 15 percent in early trading Friday.

Washington Mutual (Charts, Fortune 500), the nation's largest thrift and a leading mortgage lender as well, saw its shares up 5.5 percent.

The nation's three largest commercial banks - Citigroup (Charts, Fortune 500), Bank of America (Charts, Fortune 500) and JP Morgan Chase (Charts, Fortune 500) - saw shares up between 2 and 3 percent in early trading, gains that were down from the 4 to 5 percent gains earlier in the day but still ahead of the broader market. Citigroup and JP Morgan are two of the financial firms among the 30 components of the Dow Jones Industrial, along with American Express (Charts, Fortune 500), which gained 1 percent in early trading.

The nation's top Wall Street firms Morgan Stanley (Charts, Fortune 500) and Merrill Lynch (Charts, Fortune 500) were up more than 5 percent, while Goldman Sachs (Charts, Fortune 500) shares gained 3.7 percent.

Bear Stearns (Charts, Fortune 500), the Wall Street firm seen as most severely hit by the problems in the subprime mortgages and mortgage-backed securities, also saw its shares rise 3.7 percent in early trading. Bear Stearns cut 240 employees this week, a move that was seen as the possible start of a broader wave of layoffs across Wall Street as firms survey the damage caused by the recent downturn in financial markets.

Banks hope to maintain high net interest margins - the gap between what they earn from making loans - and pay to borrow and pay out on deposits, Reuters reported.

For much of 2006 and 2007, short-term interest rates topped long-term rates, causing margin problems industry-wide. Longer rates are now higher. But banks still face higher loan losses, which a tight credit environment exacerbates, according to the news agency.

The Fed rarely changes a key rate between regular meetings. Its move suggests that even some corporate issuers once thought healthy were having too much trouble raising cash. Lower borrowing costs may help ease a year-and-a-half of pressure on banks' lending margins, Reuters reported.

-- from staff and wire reports