The U.S. looks to Europe for a credit-crunch solution, but some wonder about a con in the ‘covered bonds’ idea
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U.S. financial regulators on Monday put their collective weight behind the Old World concept of ‘covered bonds’ as a way for banks to fund mortgages -- as opposed, perhaps, to leaving it up to Wall Street’s remaining rocket scientists to devise another New World, alphabet-soup catastrophe like CDOs.
Covered bonds, really simplified, are bonds backed by assets on a bank’s balance sheet. The investor who buys the securities gets a set interest rate based on what the assets (such as mortgages) pay. And because the bank holds on to the assets, theoretically the institution would be less reckless in its underwriting than if it knew (as with conventional mortgage-backed securities) that it was fobbing the loans off on hapless investors around the globe.
By selling a stake in the loans, the bank gets back capital to re-lend.
Sounds logical. One big question, though, is how useful this would be to banks at the moment -- when the only mortgages many of them want to make are loans they can immediately sell to Fannie Mae or Freddie Mac.
One blogger wonders about a more sinister Wall Street motive at work. ‘London Banker,’ who identifies himself as a former central banker and securities markets regulator, began a post on the subject this way on Friday:
Whenever Henry Paulson at Treasury, Ben Bernanke at the Fed and Sheila Bair at FDIC agree on anything, American taxpayers should check for their wallets to see if they are being mugged. As a result, my eyebrows rose a bit when these three started pressing in concert for covered bond issuance in U.S. markets some weeks ago.
He goes on to question whether covered bonds might be a way for savvy investment banks to corral the good assets within failing banks, leaving the dreck for the Federal Deposit Insurance Corp. to clean up. (Although the FDIC’s job is cleaning up the dreck in failures, anyway.)
Maybe we’re all just getting too paranoid, but the post is worth a read, including the comments.
Meanwhile, this Bloomberg story points out that things aren’t going so well for the covered-bond market in Europe this year.