NEW YORK — The optimism is building on Wall Street.

Financial stocks led Wall Street sharply higher yesterday on investor hopes the Obama administration will create banks to absorb the bad assets weighing down the financial system.

Financial companies surged on the notion that the government could take soured debt such as defaulting mortgages off the hands of banks and place them in a so-called bad bank to hold toxic assets. Investors have been worrying that banks won't be able to resume more normal levels of lending without somehow dumping or walling off the bad debt that is corroding their balance sheets. And the economy can't recover from a 14-month-old recession without improvements in lending and consumer confidence.