Sept. 19 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc., the two biggest independent securities firms in the U.S., led financial shares higher after the government said it would take troubled assets off finance companies' balance sheets.

Morgan Stanley surged 21 percent at 4:15 p.m. in New York Stock Exchange composite trading while Goldman climbed 20 percent. Merrill Lynch & Co., which agreed to sell itself to Bank of America Corp. this week, gained 34 percent and Citigroup Inc., the biggest U.S. bank by assets, advanced 24 percent.

U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke sparked the rally with their plan to halt the credit-market seizure, while U.K. and U.S. regulators cracked down on short sellers, investors who bet on share-price declines. Morgan Stanley, based in New York, fell by the most in its history on Sept. 17 on concern funding was evaporating.

``We've taken out the fear of systemic collapse,'' said Rod Smyth, chief investment strategist at Riverfront Investment Group in Richmond, Virginia. ``Now the focus will be back to how the economy is performing, so I think you see stocks move back to the 52-week moving average.''

Financial companies worldwide have taken more than $515 billion in writedowns on bad debt after a drop in the real estate market undercut the value of securities based on mortgages.

Broad Financial Rally

All of the 24 companies tracked by the KBW Bank Index rose today, with 11 lenders climbing more than 10 percent. The index advanced 13 percent for the day.

Morgan Stanley rose $4.66 to $27.21. Citigroup climbed $4 to $20.65 and New York-based Goldman Sachs advanced $21.80 to $129.80. Merrill gained $7.44 to $29.50.

A Resolution Trust Corp.-like entity, a 1990s fund to manage devalued assets from failed savings and loans, ``has a potential to be enormously helpful,'' said Mark Tenhundfeld, director of regulatory policy for the American Bankers Association. ``It will certainly send a signal to banks and to other capital markets players that the end is in sight for their issues and they can get back to the business of doing what they do best -- which is lending money.''

Washington Mutual Inc., the savings and loan company, also surged today, helped by the government's plan and on a report that six potential bidders were interested in buying it. The Seattle-based lender, also known as WaMu, rose 42 percent. Banks including JPMorgan Chase & Co., Citigroup, Bank of America and Wells Fargo & Co. may bid for WaMu, three people with knowledge of the talks said yesterday.

Consolidation

Wachovia Corp., the fourth-largest U.S. bank also climbed, helped by the government news and on reports that it's weighing an alliance with Morgan Stanley. Charlotte, North Carolina-based Wachovia rose 29 percent. Washington Mutual rose $1.26 cents to $4.25 and Wachovia gained $4.25 to $18.75.

PMI Group Inc. and Radian Group Inc. led mortgage insurers higher on speculation that relief to distressed borrowers could minimize claims from defaulted homebuyers.

PMI, the second-biggest U.S. mortgage insurer, jumped 74 cents, or 29 percent, to $3.31, while No. 3 Philadelphia-based Radian rose $1.23, or 25 percent to $6.23. Richmond, Virginia- based Genworth Financial Inc., the life and mortgage insurer that was once a part of General Electric Co., rose $6.10, or 67 percent, to $15.25.

``To the extent that assets are worked out instead of foreclosed upon, it's positive for the mortgage insurers,'' Howard Shapiro, an analyst with Fox-Pitt Kelton Cochran Caronia Waller, said in an interview. ``They're still cheap. Given the government action, I'd look at the ones that have been beaten down more,'' including Walnut Creek, California-based PMI.

To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net

Last Updated: September 19, 2008 16:40 EDT