The Fed held rates steady today following its FOMC meeting. It was a unanimous decision.

Many market players had anticipated that the Fed would cut rates to help ease the deep liquidity crisis facing Wall Street.

The Dow fell about 100 points on the Fed’s announcement. The index had already risen index by 105 points and plunged by 175 in a tumultuous day of trading.

In late afternoon trading the Dow was up again nearly 84 points.

Everyone assumed that the government would ride to the rescue of doomed brokerage Lehman Brothers (NYSE:LEH). Everyone was wrong. The financial markets are close to ruin. But there is a bright side, says John Stepek in British financial magazine MoneyWeek. The remaining players now know that not everyone is too big to fail…

We know bad things happen to common shareholders of companies blighted by greedy management. Companies like Enron, Tyco and Worldcom. Eric Fry at Rude Awakening says you can add the names Lehman Brothers (NYSE:LEH) and Merrill Lynch (NYSE:MER) to this list.”Greed and capital preservation don’t seem to mix very well,” says Eric. And the bonus system on Wall Street ensures that greed is the numero uno driving force driving the system…

– If the stars of yesterday’s going were toxic mortgage twins Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), Lehman Brothers (NYSE:LEH) put in a damned good supporting role. Traders pummeled the bank’s stock after a proposed investment deal with a Korean bank fell through. Lehman’s shares dropped 45%. Lehman wasn’t the only Wall Street bank to fare badly. Financial stocks overall tumbled more than 6%.

– This morning, the bad news continued for Lehman. It told Wall Street it will post a second straight quarterly loss but promised to slim down in the future, putting an end to a brief pre-market rally in its shares.

Several data releases last week – including new home sales, durable goods orders and GDP growth – signaled an improvement in the U.S. economy. But Rick Pendergraft in Investor’s Daily Edge says it is important to distinguish between stabilization and reversing course. A huge backlog of unsold houses and ongoing job losses will keep the economy on shaky ground for the time being…

Big banks don’t trust each other in the post-Bear Stearns market, and lending across the financial system is drying up.

This tighter credit environment is hitting money supply. Last month, money supply actually shrank – it grew at under the rate of inflation.

Charles Delvalle at Investor’s Daily Edge says this means investors should now expect deflation to hit asset prices.

This echoes Bill Bonner’s recent warnings about the risks of a coming deflationary slump in the U.S…

Dan Amoss at The Rude Awakening says financial stocks have not yet reached the bottom. We are still at the early stages of the credit loss cycle, and the Fed’s bailout strategy will eventually dilute shareholdings of financial institutions. Meanwhile, supply constraints will support commodity prices in the long run, and U.S. is rapidly losing its status as a safe haven for capital. For these reasons, Dan says there are still plenty of attractive short-selling opportunities in financials…

This week, FDIC chair Sheila Blair said the insurance fund might have to borrow to cover the nation’s bank failures.

The FDIC’s $53 billion simply isn’t enough to cover the assets held by the growing number of “problem” banks. The FDIC’s list has increased from 90 at the end of March to 117 in June. Total assets affected now stand at $78 billion.

If even a portion of the these banks go under, says Adam Lass in Taipan Daily, the XLF December 20 puts (XLF XT), which track the S&P 500’s Financial Select Sector, could gain of some 52%. A big number of failures could send these options up 79%…

Andrew Gordon in Investor’s Daily Edge says the Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) saga is more suited to a Hollywood script than the financial pages. Except, unlike the movies, it really is too late to save the lead roles. Andrew says the government is running out of alternatives to fully nationalizing both organisations…

The dominoes are falling, says Adam Lass in Taipan Daily.

The housing market is still a shambles, nine U.S. banks have failed so far this year, and Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) are all but nationalized. What’s more, the world’s central bankers can’t agree on what caused this mess, let along how to fix it.

But amid the gloom and doom, Adam says put options on MetLife (NYSE:MET), Bank of America (NYSE:BAC) and Capital One (NYSE:COF) can still yield triple-digit gains…