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!