The Fed cut one of its lending rates by a quarter-point and the Journal’s Fed-mole Greg Ip says it “is expected” to cut the federal-funds rate charged for loans overnight between banks by up to 0.75 percent.

The historic nature of the steps the Fed has taken reflects what the central bank sees as the unprecedented scale of the storm now sweeping through the markets and the economy. Starting with rising defaults on subprime mortgages a year ago, the crisis now has caused investors to question the ability of once rock-solid firms to repay loans.

That has triggered a massive deleveraging. Investors, banks and others are hoarding cash, pulling in their loans and trying to reduce their own exposure to risky markets. That has sent yields on risky securities such as mortgage-backed bonds up, dealing the housing market and the economy a fresh blow and leaving the Fed seemingly powerless to restore a willingness to lend by cutting interest rates, its traditional tool…

The NYT says that like the Fed’s $200 billion program unveiled last week, the new one that lends to Wall Street will take the junk securities nobody wants as collateral. That essentially means taxpayers are taking some big ones for the team by taking on those mortgage-backed securities that are unlikely to be in more demand any time soon, if ever.

Who’s next?

Now the eyes of investors and the world turn who might be the next Wall Street (or European investment banking) firm to fall. Odds are on Lehman Brothers.

Reuters says Lehman’s shares “have been battered by fears it may face liquidity issues similar to Bear Stearns” and the wire service reported Saturday that it has lots of exposure to mortgages and that some investors are pulling their money back from the bank.

Here’s BusinessWeek:

But Lehman Brothers Holdings Inc. appears to be an investment bank that investors are very worried about right now—mainly because it is the investment bank that is most similar to Bear in structure and exposure. Its stock dropped more than 14 percent on Friday.

Banks gave Lehman a vote of confidence of sorts, however, on Friday—Lehman Brothers said its new credit facility was “substantially oversubscribed,” and that some of world’s largest banks participated.

The NYT says Merrill is also being watched.

Indeed, investors are taking a grim view of the prospects for other investment banks like Lehman Brothers and Merrill Lynch. Managers of hedge funds and mutual funds say the problems at Bear confirmed their worst fears about the brokerages — that they have relied too much on leverage and have done a poor job managing the risks they took on during the boom…

And while Bear’s peers on Wall Street are not yet in such dire shape, they have surely accepted the reality of leaner times and lower valuations in the months to come.

Here’s our Quote of the Day, from the NYT:

“Banks and brokerages are a house of cards built on the confidence of clients, creditors and counterparties,” Mr. Trone said. “If you take chunks out of that confidence, things can go awry pretty quickly. It could happen to any one of the brokers.”

Who, us worry?

In non-Bear Stearns news, but going back to what triggered it all, the Los Angeles Times reports more on the story of how subprime lenders ignored warnings from people they paid in order to churn out more dodgy loans. This is a solid piece of reporting.

They could see the meltdown coming.

Freelance financial watchdogs who examined the paperwork on sub-prime home loans being sold to Wall Street had an inside view of the boom in easy-money lending this decade. The reviewers say they raised plenty of red flags about flaws so serious that mortgages should have been rejected outright—such as borrowers’ incomes that seemed inflated or documents that looked fake—but the problems were glossed over, ignored or stricken from reports.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.