Well I imagine the Fed has probably clearly signalled to the rating agencies the securities which would be better not to downgrade.

The financial world is a casino, and the Fed thinks it’s the bank and the rest of the world merely players. But there comes a time when even the bank in the casino can face insolvency, when it’s supposed to say it won’t take a bet because it’s too big and too risky. Bernanke doesn’t seem to believe that.

Sure, the Fed can print money if it has to, but the result will be a collapse in the dollar (and that means *collapse*, making the recent fall look like a blip) and a boycott of Treasuries.

Consider the alternative: selling and taking the loss on the securities in question — or parking them at the Fed for a fee. In the first scenario, banks take an immediate hit to their balance sheets. In the second, banks can delay the day of reckoning by paying a much smaller amount now.

Consider the May 19th TAF auction of $75billion for 28 days — at a 2.10% rate. If a single bank took the whole $75b, they would have to payback the $75b with $161 million in interest in 28 days. If the alternative is taking a much larger loss immediately, the Fed’s TAF isn’t such a bad idea.

If I were a big bank, I’d park all my current but worth less than par securities at the Fed. In effect, I’d give up immediate income with the hope that the securities would be worth closer to par at some point in the near future.

The problem of course is that the underlying assets are deteriorating — and even though the Fed may stop a cataclysmic collapse in value — unless they can make house prices start rising again, I think they have just slowed everything down.

For example, what happens if and when the bond insurers collapse or if the ratings agencies start to rate some of the securities held as collateral at the Fed below investment-grade?