For the third time today, the Federal Reserve has intervened to provide liquidity to banks at its discount window. After the second intervention, CNBC reported that the size of the Fed's two interventions was larger than in any day since September 2001. The third intervention was a very small addition ($3 billion) to the other two ($35 billion).

What the Fed bought was mortgage-backed securities, the market for which has dried up. According to CNBC news reports, the Federal Reserve was forced to act because US banks have been reluctant to lend short-term money to each other. As banks refuse to cooperate in the usual way because of the spreading credit crunch, the possibility of major problems over the next few months accelerates.

UPDATE: On further investigation, it is unclear whether news reports of the Federal Reserve buying mortgage-backed securities are in error.

From reading the Fed's website, I think that the Fed may have merely accepted such securities as collateral for three-day loans.

2D UPDATE: Two of the expert talking heads on CNBC are now saying that the Fed did not buy mortgage-backed securities today. Rather, according to them, the Fed accepted the CDOs as collateral. The two experts then disputed whether the Fed had effectively provided a price for these securities that are not being publicly traded. It would appear from the Fed's margin requirements for collateral that an implicit minimum price would have been set by the Fed's acceptance of them.

If so, I would hope that banks, hedge funds, and public corporations would mark their investments to market as quickly as possible so that the capital markets can adjust to this latest estimate of value, even if it is flawed. As this credit crunch is playing out, almost every day for nearly a month, we hear of new problems surfacing in new places. As some VC commenters have noted, we don't want a long-term refusal to mark assets to market, as occurred when the Japanese real estate market collapsed in 1990.