The Fed cut its discount rate by 75 basis points, even when the street predicted a 100% chance of a full 100 point cut.

Whats more important though is that Goldman Sachs (GS: chart, web, Y!) and Lehman Brothers (LEH: chart, web, Y!) both reported smaller than expected profit declines, easing fears that the liquidity crisis that sank Bear Stearns (BSC: chart, web, Y!) could spread to other investment banks. While normally I don’t view a “smaller than expected decline” report as overly bullish, I do believe it helps isolate the investment bank crisis to a smaller field.

On top of the report The Street lauded comments from both institution’s about their liquidity positions as well as the absence of any big surprises on leveraged loan or mortgage-related writedowns.

I don’t know that we’re fully out of the water just yet, but I think we’re close. At least for another quarter.

Something to watch tomorrow:

The Visa IPO. They’re offering of 406 million shares at $44 a share, topping the previously estimated range of $37 to $42 a share. Visa shares will trade on the New York Stock Exchange starting Wednesday, under the symbol “V”.

I think it’s telling they’re going forward with the largest IPO ever in todays market condition.

Finance BSC, Fed rate cut, GS, LEH, Visa IPO

It has become clearly evident that the Fed works weekends.

Last night the Fed announced an emergency quarter point discount rate cut to 3.25%, and on top of that, offered to lend money to a longer list of firms than ever before.

The rare weekend move came as J.P. Morgan Chase (JPM: chart, web, Y!) sealed a deal to buy Bear Stearns (BSC: chart, web, Y!) 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.

I had a hunch that a buyout would be in the works, as it would be much more reassuring if one major finance player bought one on the brink of failure rather than just letting the Bear lose face and go extinct.

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 like Bear Stearns, have not previously been allowed to borrow directly from the Fed.

The Federal Reserve has announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (PDCF). This facility is intended to improve the ability of primary dealers to provide financing to participants in securitization markets and promote the orderly functioning of financial markets more generally. -Source

In other words, please come borrow money from the New York Fed so we can keep the financial markets liquid.

The Federal Open Market Committee meets on Tuesday and the consensus on The Street is a Fed funds rate cut by as much as a full percentage point to 2%, and an even deeper discount rate cut is also in the cards.

If it hasn’t been evident that the Fed knows how serious the financial sector is in, it’s clearly evident now.

I chatted with Winston (who operates out of a local board of trade) about this emergency rate cut last night. He seemed to indicate that the very fact that the Fed cut rates just two days before a FOMC meeting signals something big is in the cards for the first couple days of the trading week. It also serves to unnerve many traders into thinking we’re in for some major bad news when Goldman Sachs (GS: chart, web, Y!) and others announce earnings this week. Otherwise, why wouldn’t the Fed just wait till the meeting to make the rate cuts?

It’s gonna be a fun one this week my friends!

Economics, Finance, Market Trends BSC, Finance, FOMC, GS, interest rates, JPM

A few events to remember for next week:

Goldman Sachs reports earnings – March 18th, 8:30am
Goldman Sachs finished out 2007 in good shape with shares exceeding analysts predictions. However, Goldman’s true isolation from mortgage backed securities will be revealed in earnings for the next several quarters. With the bail out of Bear Stearns, I’m sure the street will be on pins and needles to see how well Goldman is fairing in this volatile market place.

Federal Open Market Committee meeting – March 18th, 9:00am .
Traders in interest rate futures have a 3/4% cut in the fed funds rate in mind and increasing evidence that the U.S. economy may be facing a recession will help stimulate that speculation. Is it just coincidence that the meeting is taking place just after Goldman reports earnings? Probably.

Bear Stearns, Morgan Stanley report earnings – March 20th 8:30am
This isn’t going to be pretty. We already know Bear Stearns ran out of liquidity, and now we’ll see the numbers to back it up. On top of that, we’ll see how wide spread the problem is when Morgan Stanley posts earnings as well. I suspect Thursday will be a rough day.

We’re going to get a glimpse this week into how bad the health of the finance sector really is. I’m predicting another rate cut on the order of a half point, as I think the effects of interest rate cuts are going to be fairly limited for the next few months. The idea is to drive money back into the market, but with the stock market so volatile right now, that idea isn’t really bearing fruit.

I still say the Fed should leave rates alone and let this financial debacle we’re in run its course, let the smoke clear and then see how low rates need to go to stimulate the economy.

Banking, Credit, Economics, Finance, Market Trends BSC, Fed rate cut, FOMC, GS