WASHINGTON: Far more than at any time before, the Federal Reserve is putting its vast resources and its reputation on the line to rescue Wall Streets biggest institutions from their far-reaching mistakes.

Over the next few months, the central bank will lend hundreds of billions of dollars to banks and investment firms that financed a mountain of mortgages now headed toward default.

No one knows how many financial institutions will be looking for money, or how much they will seek. No one knows how much in hard-to-value securities the central bank, in return, will have to hold as collateral.

And no one knows how much the Fed could lose if the borrowers fail to repay their loans or whether hundreds of billions of dollars will ultimately have to come from taxpayers to shield the nations financial system from ruin.

In recent weeks, the central bank announced a series of emergency short-term loan programs that totaled about $400 billion. But on Sunday, Fed officials raised the stakes by offering investment banks a new loan program without any explicit size limit.

These moves, along with a $30 billion credit line to help JPMorgan Chase take over the failing Bear Stearns, is fraught with more than financial risk.

The biggest danger is damage to the Federal Reserves credibility if it is seen as unwilling to let financial institutions face the consequences of their decisions. Central banks have long been acutely sensitive to “moral hazard,” the danger that rescuing investors from their mistakes will simply encourage others to be more reckless in the future.

Fed officials for years have cringed at the mention of a “Greenspan put,” an allusion to the belief of some investors that Alan Greenspan, the former Fed chairman, would use the Feds powers to protect them against a plunge in financial markets and provide them with a metaphorical “put” Д an option to unwind their positions at an acceptable price.

But the moves undertaken by the current chairman, Ben Bernanke, amount to a much bigger insurance policy than anything Greenspan provided.

Bernanke had made clear for months that he wanted to avoid a bailout of Wall Street. But as an economic scholar who spent years studying the Depression of the 1930s, he had also drawn the lesson that panics in financial markets can transform a modest downturn into a cataclysm.

Fed policy makers now contend that the consequences of not coming to the rescue would have been a cascade of bankruptcies and defaults on Wall Street that could have undermined the financial system and risked severe damage to the economy.

Few analysts were ready on Monday to question the Feds uncomfortable effort in balancing risks. But it could be months or years before the full consequences become apparent.

Alan Blinder, a professor of economics at Princeton and a former Fed vice chairman, commented: “These kinds of crisis-prevention measures always have to balance potential moral hazard costs down the line against the clear and present danger that something is going to happen right now.

“Youre taking on substantial risks when you do something virtually unprecedented or you put money at risk. The Fed has now done both.”

Another big risk is that the central bank, in providing a cushion of emergency loans, could jeopardize its reputation as an inflation fighter. On Tuesday, Fed officials are all but certain to sharply reduce their benchmark interest rate on short-term loans, the federal funds rate Д for the sixth time in six months. The Fed has already reduced the rate in rapid stages to 3 percent from 5.25 percent, and many analysts predicted Monday that it might lower it by a full percentage point more.

Complicating the task, inflation pressures are unmistakable, even though the economy is widely thought to already be in a recession, and a downturn usually leads to slower increases in consumer prices.

On Monday, the dollar continued to decline in value against the euro and the yen, a trend that tends to push up import prices. And in commodities trading in New York, the price of gold for April delivery was quoted as high as $1,006.90 an ounce before falling back to settle at $1,002.60. Those increases stem at least in part from growing concerns among global investors about inflation in the United States and the weakening dollar.

Fed officials acknowledge that inflation has picked up slightly, but they assert that the much bigger risk is a recession caused by the squeeze in the financial markets.

Shocked by the rapid demise of Bear Stearns and its fire sale to JPMorgan Chase, investors sold off the stock of Lehman Brothers and several other financial firms Monday.

Lehmans shares began the day 35 percent lower than on Friday and recovered slightly, ending at $31.75, down $7.51, or 19.1 percent. A whopping 224 million shares traded hands, or 16 times the normal volume.

Since the mortgage market crisis unfolded in the summer, investors have fretted that Lehman Brothers will stumble, and its stock has fallen from a peak of $82 a share then. The firm was a major player in the market for subprime and prime mortgages, and it is the smallest of the major Wall Street firms.

Still, the storied investment bank has defied expectations more than once, as in 1998, when it seemed to teeter after a worldwide currency crisis, only to rebound strongly.

“Its not surprising that people are looking to Lehman next,” said Jeffrey Harte, a brokerage stock analyst at Sandler ONeill Partners, a Chicago-based research firm. He said Lehman and Bear Stearns had a number of similarities. Both had relatively small balance sheets, they were heavily dependent on the mortgage market, and they relied heavily on the “repo” or repurchase market, most often used as a short-term financing tool.

Richard Fuld Jr., Lehmans famously intense leader who flew back from India over the weekend, says that Lehman has studied the past and is in good shape today, with a comfortable level of funding, or liquidity.

“We learned a ton in 98,” Fuld said. “We have a much different liquidity profile today than we did then.”

Fuld was referring to investors panic after Russia defaulted on its debt, pushing a big hedge fund to the precipice.

The Wall Street bailout of that fund, Long Term Capital Management, proved to be the nadir in that financial crisis of nearly a decade ago. “Ninety-eight was pretty ugly for us,” he said. “This is uglier for the system Д its more pervasive and more global.”

Lehman was not the only financial stock hit hard on Monday. MF Global, a large global commodities broker, dropped 65 percent, while Washington Mutual fell 12.8 percent, and Morgan Stanley closed down 8 percent. The Amex broker-dealer index fell 10.3 percent.

According to an analysis by Buckingham Research Associates, an independent research firm, Lehman has $169.8 billion in total liquidity, compared with $168.6 billion at Goldman Sachs, and a considerable step up from the $35.3 billion at Bear Stearns. In an examination of all the major brokers over the weekend, Buckingham concluded that Lehman, though now the smallest firm on the Street, has the highest percentage of liquidity (25 percent) of total assets, suggesting a strong cushion.

According to the firms securities filings, Lehman has $35 billion in cash and liquid assets and $160 billion in unencumbered assets Д like loans and securities backed by commercial mortgages that it can use as collateral to borrow more, should it desire.

Lehmans doubters are not convinced, citing several issues. Recent concerns about financing essentially amount to a question of confidence. Lehmans management is battling that issue by being far more aggressive in talking about its financial strength than it did a decade ago.

The skeptics point to the rapid growth of Lehmans Level 3 assets Д those that the firm says have no “observable” market value. Those assets more than doubled in the last six months of last year, rising to $42 billion.

Other areas for concern include Lehmans $39 billion in commercial real estate assets and $37 billion more in residential mortgages, businesses that have been hammered this year. If the moves in the real estate indexes were applied to the firms totals, Lehman would take an estimated hit of $5 billion to $6 billion. (Lehmans critics declined to be identified because hedge funds that short a companys stock are often accused of profiting from another companys pain).

Lehman has argued in the past that it saw the mortgage crisis coming and hedged effectively against some of the downturn.

Fuld, who is often referred to as “the warrior” or “the survivor,” is not shying from skeptical markets. Having admitted he made a mistake by ignoring market rumors in 1998, he made a public statement on Monday.

“The Federal Reserves decision to create a lending facility for primary dealers and permit a broad range of investment-grade securities to serve as collateral improves the liquidity picture,” he said, and “from my perspective, takes the liquidity issue for the entire industry off the table.”

BAGHDAD, June 20 (UPI) — Iraqi leaders beginning a week-long China visit are hinting at reigniting a Saddam-era oil deal, though such a move is clouded by Iraq’s stalled oil law.

President Jalal Talabani this week is leading a delegation that includes the oil minister and four other cabinet members, the first Iraqi head of state visit to China since diplomatic ties were set up in 1958, China Daily reports.

“We encourage Chinese enterprises to join the multinational competition for exploration of Iraqi oilfields,” said Mohammad Sabir Ismail, Iraq’s ambassador to China.

The visit will encompass a spectrum of economic meetings, but with Iraq oil sales making up 93 percent of the federal budget and in deep need of investment, the petroleum sector is likely to top the bill.

Iraq produces only 2 million barrels per day now, down from 2.6 million bpd before the war. The country is home to 115 billion barrels of proven reserves, the third largest in the world.

While Iraq’s oil sector was crippled by sanctions, Saddam Hussein also mismanaged the sector, overworking it and depriving it of needed maintenance. He did sign numerous oil deals with various countries, including China.

The Wall Street Journal reports Talabani will try to renew a $1.2 billion deal to explore an oil field in Iraq’s southern Wasit province, first signed in 1997 with the China National Petroleum Corp.

“I am looking forward to the visit and hope it will open a new phase of the bilateral relations between the two countries,” Talabani told the Xinhua news agency.

Oil Minister Hussain al-Shahristani said during an October 2006 visit to China that negotiations over the Al Ahdab oilfield were to begin. A law governing Iraq’s oil, however, has been stuck for months in political wrangling over control of the oil fields. Any new contract depends on the oil law, which may not even be introduced to Iraq’s parliament until the end of July.

Without the law to dictate investment guidelines, violence in the country has also deterred oil companies. But China, working in Nigeria’s militant-laden oil sector and genocidal Sudan, may be willing to take the risk to meet its growing demand for oil.