Fed, Banking Hinges on MBI

So, Fed, how do you feel about the prospect that $100 billion in residential mortgage backed instruments that you thought were AAA-quality because of insurance are now worth a fraction of that, given the defaults we are seeing?

So Fed, what do you think of the fact that the bulwark that protects Washington Mutual (WM - commentary - Cramer's Take) and Citigroup (C - commentary - Cramer's Take) and Countrywide (CFC - commentary - Cramer's Take) from the reaper -- insurance -- is about to unravel?

Or are you too busy, Fed? Are you too busy, Andy Lacker, worried about the price of a Big Mac and fries and thinking that you can get that price of food down without creating a housing depression that could destroy the current banking system because there is no net interest margin that allows them to rebuild book value?

Are you too focused on the dollar, Fed people, that you don't realize that the monoline insurers often insure each other, so if MBIA (MBI - commentary - Cramer's Take) loses, they all lose and the banks will then have to mark their inventory down to realistic numbers, which will cause immediate capital shortages?

Do you, Bill Poole, know how the monolines work and how the residential mortgage-backed securities tranche system works and how the insurance is the linchpin that is about to be pulled?

Do you, New York Fed, with all of your nifty $20 billion auctions, realize that there are another 20 of these that need to be done and if you just lower the discount window to 50 basis points below the fed funds rate, you can forestall all of what is about to happen to banking?

Or are you too busy thinking that you can drive the price of gasoline down with higher interest rates?

I am aghast that this is happening, this fast-motion unraveling in the name of caution.

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