The Fed is now an investor in the Mortgage Backed Securities market. It allowed the market to run amok, banks make billions and now it is forced to save the market by actually holding securities that are meant for risk investors. The Fed will only hold AAA rated MBS.

What happens when the Moodys wakes up one morning and realizes that AAA rated mortgage securities were in fact based on new information, no longer AAA but AA or less. What happens then ? does the Fed dump them or does it lower the bar. Who knows.  The one thing which strikes me is that we have the Fed , a key government entity , relying on the analysis of a group of private corporations who in the last year have shows us that their ratings do not reflect reality and can change in an instant. The ratings system is broken and its accuracy has now fallen into the category of projections by economists - and we all know how reliable economists are…