By Kevin G. Hall | McClatchy Newspapers

NEW YORK — On May 1, the Dow Jones Industrial Average soared 189 points, roaring past 13,000 for the first time since Jan. 3. Wide daily stock-price swings are becoming rare, blue chips have regained most of the ground lost earlier this year and there's less talk of a global financial crash.

So we're out of the woods, right? The answer is, nobody's quite sure.

"We are closer to the end of this problem than we are to the beginning," said Treasury Secretary Henry Paulson, repeating April 30 on Bloomberg Television a phrase that's become almost a mantra on Wall Street.

The same statement was made in April by the head of Citigroup, the nation's largest bank, as well as by the CEOs of several top investment banks. Their consensus: The worst is over.

However, many important voices disagree.

"I can't honestly say I think that's the case yet. I think we have a ways to go yet. I don't think we've cleansed the system," said David Rubenstein, founder and president of the Carlyle Group. It's one of the world's largest private-equity firms, which borrow large sums of money to take over companies, improve them and resell them for a profit.

Speaking to the Society of American Business Editors and Writers last week, Rubenstein said that markets have just scratched the surface of discovering balance-sheet holes. He added that "no one really knows when the upswing is going to happen. ... I don't think we are quite at the bottom yet, and I do think we have some months to go."

The deep housing slowdown triggered problems last August in housing finance and they've since spread. Home prices and sales continue falling month after month, leaving the health of an important part of the financial sector unclear.

"I think the reality of it is, nobody knows where we are right now," said Daniel Mudd, president and CEO of quasi-government mortgage lender Fannie Mae.

"This is terra incognita," he added. "There is no silver bullet to solve this problem. Time has got to pass."

Still, one reason for Wall Street's decidedly more upbeat mood is the Federal Reserve's unprecedented action on March 16 to broker the sale of investment bank Bear Stearns.

The Fed not only orchestrated the sale at a fire-sale price to JP Morgan Chase, but it also did something no Fed had ever done before: It became the lender of last resort to virtually all players on Wall Street, not just commercial banks. And it accepted virtually any sort of financial instrument as collateral, including the toxic mortgage bonds that triggered today's crisis.

The message was clear: The Fed won't stand by and watch a domino-like collapse of financial markets.

"I think that whole incident calmed people down. It showed that the Fed was going to take whatever steps were necessary," said Larry Kantor, managing director of Barclays Capital in New York. "As more and more information is coming out on how financial institutions are faring, obviously they've lost a lot of money, they continue to lose a lot of money, but the numbers we've seen ... are not life threatening. We're all going to survive this, and that is a real comfort."

That wasn't a sure thing two months ago.

What wasn't reported at the time, but has since emerged in dribs and drabs, is that Bear Stearns wasn't the only institution under pressure from fleeing investors and business partners in mid-March.

Several industry players privately told McClatchy that the modern equivalent of a bank run had been starting on Lehman Brothers and Merrill Lynch, two other important investment banks.

Some reasons for Wall Street's renewed optimism include:

_ Investment banks owning up to steep losses in mortgage bonds backed by

subprime home loans and taking huge write-downs on their balance sheets.

_Investment and commercial banks are aggressively seeking to raise capital

through stock offerings or granting investment stakes to outsiders to shore up their balance sheets.

_Investors are again differentiating between various kinds of bonds and other

financial instruments, instead of fleeing everything as risky.

_ Interest rates on short-term Treasury bonds are rising, which means that fewer

investors are seeking haven in them and instead are taking more risks.

Still, as if to underscore that serious threats remain, the Fed on Friday announced jointly with the European Central Bank and the Swiss National Bank a series of measures to boost credit markets. All three institutions cited "persistent liquidity pressures" in announcing the move — a clear signal that credit markets still aren't functioning normally and system-wide risk remains.

The new actions included doubling to $150 billion the amount of emergency short-term loans that the Fed now auctions twice a month, boosting the level of currency exchanges with foreign central banks and widening the kinds of collateral that the Fed accepts in exchange for emergency loans.

This last move involves accepting asset-backed securities. These are debt instruments that, like mortgage bonds, are securitized, meaning they're comprised of pools of assets that are collateralized by the cash flow from these assets. The underlying assets can be anything from credit-card and student loans to aircraft or railcar leases.

Asset-backed securities help corporations and other debt issuers to finance their short-term needs, but this segment of the credit market remains under distress, as investors frown on virtually any form of securitization.

"I don't think the credit crisis is by any means over," warned Kantor. "I would say there are still parts of bank balance sheets, like home equity loans, that are still in the process of losing value. ... You are seeing other asset values continue to go down too."

That's why Bank of America announced in late April that it had quintupled the amount of money it set aside to cover bad loans to slightly more than $6 billion. CEO Ken Lewis downplayed Wall Street's optimism, telling analysts that "it would be too early to strike up the band" and declare victory.

However, some stability is returning, and that will help as new problems unfold.

"It's going to be, in our assessment, a challenge over the next two years," said Mark Howard, director of credit analysis at Barclays Capital. "It's going to limit the vigor of a rebound (in the broader economy), I think. It's going to mean that banks are going to continue to set aside reserves. They are going to have to be more disciplined about to whom they lend money."

Howard expects rising defaults in commercial real estate loans, more defaults on corporate debt and slowing consumer spending, which will hurt retailers. He already sees a broader pullback in lending for mortgages, student loans and automobile purchases.

National banks are charging almost 2 full percentage points higher for car loans than they did four years ago, even though the Fed's benchmark lending rate stood then where it does today, at 2 percent. With prospects of the U.S. economy potentially heading for a shallow recession, banks are playing it extra safe.

"I think banks are definitely tightening up. Rates are still competitive," said Marc Bortnick, president of Bortnick Ford, a dealership in Upper Marlboro, Md., adding that lenders are just more cautious, even with consumers with good credit.

ON THE WEB:

The Fed statement:

www.federalreserve.gov/newsevents/press/monetary/20080502a.htm

European Central Bank statement here:

www.ecb.int/press/pr/date/2008/html/pr080502.en.html

Swiss statement:

www.snb.ch/en/mmr/reference/pre_20080502_2/source/pre_20080502_2.en.pdf