Buyer of last resort

Ahead of what is shaping up to be another horrible day for equity markets, the Federal Reserve made a none-too-surprising announcement. The headline says it all:

Fed Adds $19 Billion in Funds by Buying Mortgage Debt

The Federal Reserve added $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.

The Fed accepted only mortgage-backed debt as collateral for this morning's weekend repurchase agreement. Losses in U.S. subprime mortgage investments have been rippling through global credit markets, driving interest rates higher and sinking share prices. The Fed also added $24 billion yesterday, the most since April, as demand for cash increased.
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The European Central Bank today loaned 61.05 billion euros ($83.6 billion), pumping funds into the banking system for a second day. The ECB added an unprecedented 94.8 billion euros yesterday.

Some banks may experience "unusual funding needs,'' the Fed said in a statement from Washington. The Fed's discount window is open and the central bank pledges to provide liquidity, the Fed said.

Some traders were speculating yesterday that the Fed will cut rates at an emergency meeting as soon as next week, according to a Merrill Lynch & Co. report published yesterday.

Interest-rate futures for August show investors see the chances of a quarter-point reduction in the Fed's key rate on any day from Aug. 16 at higher than 50 percent, Merrill strategists Joseph Shatz and Stanley Sun wrote in the report.

Countrywide Financial Corp., the biggest U.S. mortgage lender, said it faces "unprecedented disruptions'' that may reduce profit, suggesting a credit crunch that started with the U.S. subprime market will spread.

So, does the price paid by the Fed become the new market price?

Now everyone can mark to market, the Fed being the market?