The extraordinary weekend moves came as J.P. Morgan Chase (JPM:

sealed a deal to buy Bear Stearns Cos. (BSC:  for just $2 a share backed by up to $30 billion borrowed from the Fed. The Fed board gave its approval to that unique funding arrangement, which guarantees JP Morgan against losses from buying Bear. See full story.

 

The Fed board also approved the creation of a special lending facility through the New York Fed that would be available to members of its primary dealers list, which includes both commercial banks and investment banks. Investment banks, such as Bear Stearns, have not been allowed to borrow directly from the Fed.

JP Morgan has access to the discount window through its Chase Bank subsidiary, but Bear Stearns does not have direct access.

 

Events have unfolded at warp speed over the past week. On Tuesday, the Fed announced a new lending program for primary dealers in the bond markets, but that program won't go into effect for two more weeks. On Friday, the Fed allowed Bear Stearns to borrow money via JP Morgan in a desperate bid to save the firm, which has been pummeled by losses on exotic securities backed by subprime mortgages.

 

The Federal Open Market Committee meets on Tuesday. Analysts expect the FOMC to cut the target for the federal funds rate by as much as a full percentage point to 2%. Another cut in the discount rate is also likely.

The new lending program would operate for at least six months, and would offer loans for as long as 90 days, rather than 30 days under the regular discount window. Loans from the new program would be backed by a "broad range of investment-grade debt securities," the Fed said. The interest rate would be the same as the discount rate.

 

"The Federal Reserve, in close consultation with the Treasury, is working to promote liquid, well-functioning financial markets, which are essential for economic growth," said Fed Chairman Ben Bernanke, in a statement. "These steps will provide financial institutions with greater assurance of access to funds."

Robert Brusca, chief economist at FAO Economics, said the new lending facility created a general way to help other dealers.

 

"The Fed has more information now that it has seen what Bear Stearns had on its books," Brusca said in an interview.

 

President Bush will meet with Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Chris Cox on Monday at 2 p.m. Eastenr.

 

Earlier on Sunday, Paulson went on television to project an image of confidence in the U.S. financial market. He said Washington would do what it takes to foster stability on Wall Street. See full story.

Dean Baker, the co-director of the Center for Economic and Policy Research, criticized the Fed's "real turn to secrecy" in the new auction facilities.

 

The Fed does not reveal the names of firms that borrow funds in the auctions. The purpose was to get around the "stigma" of banks that didn't want to borrow at the discount window because of the questions it would raise about its balance sheet.

 

But, in an interview, Baker said "now is not the time to shut the doors and keep everything in the dark."

Baker said he sensed a whiff of panic at the Fed and in the Treasury Department.

 

"The main thing is that they [Fed and Treasury] are really really scared. Telling us that everything is great is an insult to intelligence. They should own up to it and talk seriously to people," Baker said.

 

Peter Morici, a professor of economics at University of Maryland, criticized the Fed for not imposing meaningful conditions on the financial institutions to which it is providing cash.

 

As a result, banks continue to impose onerous conditions on their innocent customers, he said.

"Today's moves by the Federal Reserve are the desperate acts of failing men," he said.

 

Below is a list of primary dealers who will be able to borrow directly from the Fed's new program announced Sunday:

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.