Thank you, Ben.

It's usually hard to impress Wall Street. But a day after cheering the news of the downfall of a former nemesis, Wall Street was celebrating again—but this time, putting money on it. Big money.

Stocks had their biggest rally since October 2002 after the Federal Reserve set up a new auction facility to make as much as $200 billion in Treasury securities available to Wall Street banks.

The Dow Jones industrial average soared 416.7 points, or 3.6 percent, to close at 12,156.8. That is the largest one-day gain since July 2002, and the fourth-largest in history, according to the Wall Street Journal.

Other indexes did even better. Standard & Poor's 500 stock index jumped 47.3 points to 1,320.7, a gain of 3.7 percent. The Nasdaq composite index surged 4 percent, adding 86.4 points to close at 2,255.8.

Although prior cuts in interest rates or suggestions of further reductions have sparked increasingly muted pops on Wall Street, investors today hailed the Fed plan as innovative and aggressive. The most important dimension of the new auctions is that the accepted collateral has now been broadened to include Fannie Mae and Freddie Mac securities and triple-A residential mortgage-backed securities, the market for which has been nearly paralyzed by the housing crisis. And the loans will be for 28 days instead of overnight. The auctions will be held weekly, beginning March 27.

"By permitting borrowers to put up devalued collateral that currently contaminates the balance sheets of financial institutions, [this move] should provide a generous bout of temporary relief to portfolios overweight with distressed assets," said Joseph Brusuelas of IDEAglobal, according to the Wall Street Journal's Real Time Economics blog.

Financial stocks in the S&P 500 index rose 5.2 percent: Citigroup gained 8 percent; Merrill Lynch gained 6 percent. Even Bear Stearns, which had tumbled earlier for a second day on fears that the firm was having liquidity problems, recovered to end with a gain of 2 percent for the session. On Monday, shares of Bear fell 11 percent.  

While Wall Street cheered, others were skeptical.

Paul Krugman, on his New York Times blog, points to an article by Mark Pittman of Bloomberg News, who notes that Standard & Poor's has refrained from cutting the ratings on many triple-A securities.

Pittman says that "none of the 80 triple-A securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February," according to data compiled by Bloomberg.

"So basically," Krugman says, "the Fed is going to be swapping Treasuries for dubious securities, in an attempt to give the market a really big slap in the face."

Barry Ritholtz of the Big Picture blog says: "The good news is this will help brokers and banks; the bad news is it will do nothing to help the housing market or stop the decline in house prices. Nor will it help resolve the inverted pyramid of derivatives that sits atop housing."
 
The Fed said in its statement that it was also extending currency-swap arrangements with the European Central Bank and the Swiss National Bank. Those banks, as well as the Bank of England and the Bank of Canada, separately announced liquidity measures.

"Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets," the Fed said. "Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures."