THE FED STEPS IN

Seems like this was a pretty serious problem, more than a simple "market correction."

Fed Cuts Discount Rate, Acknowledging Need to Act
(Update11)
By Scott Lanman

Aug. 17 (Bloomberg) -- The Federal Reserve lowered the interest rate it charges banks and acknowledged for the first time today that an extraordinary policy shift is needed to contain the subprime-mortgage collapse that began roiling the world's financial markets two months ago.

The Fed, in a surprise announcement in Washington, cut the so-called discount rate by 0.5 percentage point, to 5.75 percent.

This is the first unanticipated reduction in borrowing costs between scheduled meetings since 2001, and Ben S. Bernanke's first as Fed chairman.

The last time the Fed enacted emergency rate cuts was in 2001, first in reaction to the bursting Internet bubble and then in the aftermath of the Sept. 11 terrorist attacks. In total, the Fed cut its benchmark rate 11 times that year, reducing it to 1.75 percent from 6.5 percent.

Officials today also extended so-called discount window borrowing, allowing 30-day financing instead of a standard overnight loan.

JPMorgan, the biggest lender in the leveraged buyout market, may forfeit about $1.4 billion of second-half profit because of loans it can't sell, according to Keith Horowitz, an analyst at Citigroup.

``Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth,'' the Federal Open Market Committee said today. ``The committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects.''