I think it is one of the first semi-sound ideas by Paulson in this entire mess, but it doesn’t get us out of the current mess.
There are significant barriers to acceptance by the banking industry, however. Here’s a couple I can think of off the top of my head:
1. The accounting. In the German style of covered bonds (and most of the covered bonds in the EU are issued by German banks, last I looked), the bank has to keep the covered bond on their books. This runs counter to what banks have wanted to do over the last 10+ years here in the US — ie, move illiquid assets off their balance sheets into this “Level III” asset bucket that is off their balance sheet.
2. As a result of (1) above, the bank is keeping the risk, or at least some component of the risk. The all-too-common practice in the US markets just now has been to try to sell off risk through derivatives, or to offset it with thimblerigging, etc. Bankers have to be pimp-slapped and taught about risk, ie, that they minimize their risk by minimizing risky loans. (duh!). There can be no hiding from systemic risk posed by lending money to people who can’t/won’t repay said loan.
3. In terms of market perception, I see covered bonds as nothing more than the current RMBS with a wrap. The difference here is that the wrap depends on the bank, not a bond insurer. So now the credit ratings agencies have to work even harder at a function in which they’ve proven themselves incompetent, ie, rating the creditworthiness of the wrap.
Well, we know the monolines are screwed. And we know that most of the banks issuing RMBS paper are in very precarious shape as well. So... we’re going from a single wrapper failure to many banks needing to fail to induce the same problems as a single wrapper failing. OK, that’s an improvement in that we no longer have single points of failure as we have in the monolines just now, but the current market probably would see no upside because the banks are in such hard shape.
Net:net, I don’t see anything here in covered bonds that is going to help us right now, because so many components of our financial system are broken: the ratings agencies, the bond market, the derivatives on credit, bank accounting, bank liquidity, bank solvency, etc.
They *could* be a useful tool to migrate the mortgage market away from dependence upon Fannie/Freddie/FHA in the future, and for that reason, they deserve some thought and evaluation.
Bingo NVDave. And the real point is that the saavy money guys won’t bite. Real-estate will correct at least another 10%. So for this plan to be truly effective, you need investor confidence and that is GONE, bye-bye. Stop it with the banking games boys. Your time to act as true stewards of this economy is gone. You know get to have the Democrats on the Hill telling you how to lie to the American people until it collapses. Best we can hope for is heavy subsidies into energy, ALL kinds to fuel future innovation. This does also help the banks, just not in the timeframe to save the corporate buddies. The free market investor is letting them hang, they had lots of meals of Kobi steak and red wine in there indoor tennis courts as they rigged the free market. Now Paulson and Frank can shill for the politicians whom openly are now creating the greatest fleecing event of all history. Will you continue to shill Mr. Paulson and Mr. Frank? How about you Chris Dodd and other Demonrats? Think we’ve never heard of a nifty invention called the database so we will find you? Better invest in some Atlas rockets or plastic surgeons.
1) CEO, Mr. Fuld from Lehman Brothers? Lying in public on SeekingAlpha.com in an open letter to Warren Buffet stating they had a meeting. Mr. Buffet responded telling him it never happened.
2) Mr. Thaines of Merrill Lynch, lying repeatedly to the investment community on need to raise money from being the first to set the floor on CDO’s. ‘Marked to market’ is now .22 cents on the dollar. You must now know what that means NVDave?
Our entire government is now fascist. Just like Nazi Germany whom created a great scapegoat of the Jews to fleece for there 40 years of economic stupidity. This time, it’s the American public, We the People deserved it for not understanding economic theory and how our assets declined. What a bunch of traitors and they think all of us are stupid?