No, they just loan money to banks who have loaned money irresponsibly when those banks get in trouble.
No, they don't loan money to banks to make loans.
On the weekend I'll dig up the excerpt from Nouriel Roubini's Crisis Economics
where he notes how the Fed bailed out failing banks with long-term loans, because those banks had made bad bets. I don't have time just now.
Okay I found the passages I was looking for in the book:
"In effect, the government jumped directly into the market, reaching far beyond the usual mechanisms of injecting liquidity--cutting the overnight Federal funds rate--and made loans directly to ailing financial institutions. It became the quintessential lender of last resort, making loans and liquidity available to an ever-widening cross section of the financial system."
Traditionally, the Fed had lent banks money overnight via the discount window with a penalty compared the Federal Funds rate (the rate at which they borrow from each other overnight), but during the crisis, it lent for up to 90 days at no penalty. (So these weren't technically "long-term loans", but they were 90 times longer-term than any loans the Fed had made to banks before that.)
According to Roubini, the Fed didn't just come to the aid of banks with liquidity problems; they came to the aid of those that were insolvent as well:
"In normal times, the lender of last resort helps individual banks with liquidity problems. But in this particular crisis, central banks ended up providing support to virtually every bank."
The Fed even sent dollars to other central banks abroad, so that those central banks could loan dollars to failing foreign banks, so that those banks could make payments on dollar-denominated loans, which they otherwise wouldn't have been able to make.