The Bailout Has Transformed Into An MBS Buying Program

When the financial crisis hit its high tide last year the Federal Reserve used a couple of blunt instruments to rescue financial institutions.

The largest of the credit easing policy tools were the Fed's programs direct lending to financial institutions, including opening the discount window to investment banks and extending an unprecedented credit line to AIG. It also provided credit to "key credit markets" in the form of loans and guarantees to money market funds and asset backed securities markets.

But over the course of 2009, those program have shrunk or been phased out. Meanwhile, one program, the Fed's purchase of mortgage back securities, has grown by more than enough to make up for the decline of those program. What this means is that despite the rollback of some Fed bailout programs, the market is still highly leveraged to the balance sheet of the Fed.