Friday morning, the

Federal Reserve

propped up the world stock markets with a 50-basis point cut, to 5.75%, in its discount window rate charged to member banks. It also extended the term of these overnight loans to as long as 30 days, still accepting home mortgages as collateral.

The Fed admitted that tighter credit and deteriorating financial markets "have the potential to restrain economic growth going forward," and "downside risks to growth have increased appreciably."

The FOMC statement also reminded the investing public that the Fed is "prepared to act" to protect the economy from further "disruptions in financial markets."

The rate cut action was held off as long as possible to avoid confirming the perception of economic weakness in the face of recent data suggesting continued moderate growth. Now that the cat is out of the bag, the likelihood increased that Fed Chairman Ben Bernanke will cut the Fed funds target rate, sooner rather than later.

Even prior to the Fed moves, the

PowerShares Dynamic Banking Portfolio

(PJB)

had rebounded off recent lows and turned in a total return performance of 3.25% for the five trading days ending Thursday, Aug. 16.

This ETF is made up of 84% banks, 11% savings and loans and 5% diversified financial services, with the biggest holdings being

Northern Trust

(NTRS) - Get Northern Trust Corporation Report

,

Keycorp

(KEY) - Get KeyCorp (KEY) Report

,

Comerica

(CMA) - Get Comerica Incorporated Report

,

Bank of America

(BAC) - Get Bank of America Corp Report

and

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

.

Two of the holdings contributing to this fund's gain were

WesBanco

(WSBC) - Get WesBanco, Inc. Report

, up 19.94% on insider buying, and

Amcore Financial

(AMFI)

, up 12.43%, with the announcement of its 97th consecutive quarterly dividend.

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In second place, the

KBW Regional Banking

(KRE) - Get SPDR S&P Regional Banking ETF Report

ETF added 3.08% with a portfolio of U.S. stocks allocated to 94.4% banks and 5.6% savings and loans. The position moving up the furthest,

Pacific Capital Bancorp

(PCBC)

, jumped 24.24% during the period due to the initiation of a $25 million share-repurchase program.

Pacific Capital Bancorp was also the top-performing holding of our third-place fund,

(BKPIX) - Get ProFunds Bnks UltraSect Inv Report

ProFunds Banks UltraSector ProFund, up 2.98% for the week. This open-end fund is leveraged 150% to the Dow Jones U.S. Banks Index.

Down 21.79%, the

First Trust/Gallatin Specialty Finance and Financial Opportunities Fund

(FGB) - Get First Trust Specialty Finance and Financial Opportunities Fund Report

closed trading on Aug. 16 at a discount to its net asset value of 9.43%. The fund has not released its current top holdings information since May 31 when the fund was 96.2% cash and 3.5% capital markets stocks.

Also, with a double-digit loss, the

Claymore/Clear Global Exchanges, Brokers & Asset Managers Index

(EXB)

ETF gave up 13.17%. The fund invests almost exclusively in diversified financial services companies, with the largest holdings being

CME Group

(CME) - Get CME Group Inc. Class A Report

,

Franklin Resources

(BEN) - Get Franklin Resources, Inc. (BEN) Report

, Deutsche Boerse AG,

NYSE Euronext

(NYX)

and

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

.

The position doing the most damage this week is an Australian hedge fund, HFA Holdings, which boasted about profiting by selling short firms stricken by the subprime meltdown. As some of these financial companies bounced back, HFA sank 26.69%.

Friday's move by the Fed reassures financial institutions and the public that liquidity will be made available to keep the economy from seizing up and the markets from heading into the great unwind -- where fire-sale pricing begets forced fire-sale pricing.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.