About time for the Treasury, SEC, FDIC, or the FED to do someting really stupid on top of what CONgress just did. Hope they don't presss the wrong button boys and girls. It might go BOOM!
July 22 (Bloomberg) -- Treasury Secretary Henry Paulson's plan to revive U.S. mortgage financing depends on investors buying the same kind of bonds they're shunning in Europe.
How do covered bonds allow US consumers with strained budgets and wrecked balance sheets to purchase houses that are still very expensive by historical standards?
Or is this just more the kind of scam innovations that got us in this mess to begin with by hiding the simple fact that all these new securities are just methods for getting people to take on bad debt without realizing it?
It sounds like Paulson has found a new way to turn lead into gold.
Why do these banks view covered bonds more attractive? Covered bonds require that assets are keep on the banks balance sheet where as selling mortgages to FRE/Fan doesn't affect cap ratios.
I am sure that these bonds will be peddled to pension funds and retiree's with some success as Ben has rendered the treasury bills worthless. Hope springs eternal...
So if you combine mortgage-backed securities, which no investor wants right now, and bonds issued by banks, which no investor wants right now, into one security -- covered bonds -- this helps HOW? Strange.
If a bank issuing covered bonds goes bust, the covered bond holder gets the mortgage loan assets which secure it, leaving the failed bank with all the crappy assets and less value for regulators to give to depositors.
Why do these banks view covered bonds more attractive? Covered bonds require that assets are keep on the banks balance sheet where as selling mortgages to FRE/Fan doesn't affect cap ratios.
I really think covered bonds are going to be the only thing left for banks to try to recapitalize. Selling off your performing assets just does not make sense.
Renewed credit turmoil and volatility led the European Covered Bond Council (ECBC) on Wednesday to suspend inter-bank market-making in covered bonds until Monday, Nov. 26. The move is a sign of the stress...
This was mentioned a few weeks ago in the Wall Street Journal as well. The only benefit being that the mortgage is being reported on the balance sheet of the financial institution instead of creating some off balance sheet entity where the mortgages move to back the interest and principal payments. From what I see, there's no real difference between a MBS and a covered bond besides the transparency issue that they seem to be running into with CLOs, MBS and the like. The transparency technically was always there with CLO's provided you take the time to read the 250+ page offering memorandums that come with the issue.
I really think covered bonds are going to be the only thing left for banks to try to recapitalize. Selling off your performing assets just does not make sense.
For all the horrors of the Great Depression, at least it had an end and all remnants of the filth were largely gone after a decade.
It looks more and more like this episode is going to haunt us for decades to come.
Just like Japan's episode in the 80s still haunts us to this day via the Yen carry trade.
While covered bonds have a long history in Europe, they are a newcomer to the U.S. capital markets, with only two U.S. issuers to date (Bank of America and Washington Mutual) and an initial issuance in 2006.3 Covered bonds are full-recourse obligations of the issuing IDI, secured by collateral (most often mortgage loans) that remains on the IDI's balance sheet.
he insolvency regime for U.S. IDIs does not permit investors in covered bonds to enjoy all of the benefits available under some European legal systems. However, a structure has been devised that provides some of those benefits. As described by the FDIC:
In the covered bond transactions initiated in the U.S. to date, an IDI sells mortgage bonds, secured by mortgages, to a trust or similar entity (''special purpose vehicle'' or ''SPV''). The pledged mortgages remain on the IDI's balance sheet, securing the IDI's obligation to make payments on the debt, and the SPV sells covered bonds, secured by the mortgage bonds, to investors. In the event of a default by the IDI, the mortgage bond trustee takes possession of the pledged mortgages and continues to make payments to the SPV to service the covered bonds.4
Im with you AC. This is slowly looking more and more like the Japan problem in that we are going to kick this can of valuation down the road for as long as possible. That's the kind of thing that leads to a banking crisis that lasts years, rather than months.
While market participants believe that transactions could be structured to survive these stay periods, doing so would create significant incremental transaction costs. As a result, various parties approached the FDIC asking for advance consent to the exercise of liquidation rights in covered bond transactions. The resulting interim final policy statement provides the requested advance consent, but only for specified actions and only for covered bond transactions that satisfy several requirements.
Specifically, in qualifying transactions, the FDIC has granted its prior consent to covered bond obligees to exercise their contractual rights over collateral no sooner than ten business days after either (a) a monetary default on an issuing IDI's obligation to the covered bond obligee, or (b) the effective date of the FDIC's repudiation of the covered bond obligations, as provided in a written notice by the conservator or receiver. Under the Federal Deposit Insurance Act, contracting parties cannot terminate agreements with an insolvent IDI solely on account of either the insolvency itself or the appointment of the FDIC as receiver or conservator. The policy statement does not alter this limitation or permit contracting parties to exercise remedies triggered solely by insolvency or the appointment of the FDIC as receiver or conservator.
This is a conduit mechanism to transfer defaults to taxpayers!
playing the markets this summer is like finding a roulette wheel that hits red 70% of the time. Is daytrading always this easy?
Yeah I think MS said it right "Wash, rinse repeat"
Thank god for those bailout plans I didn't think the financials would ever go up to short again...
Its so easy I am worried actually... Won't last forever though eventually the market will bottom. Then flat for years and no money will be made long or short... Don't quit your day job...
Hjalmar Schacht formed the limited liability company Metallurgische Forschungsgesellschaft, m.b.H., or "MEFO" for short. The company's "mefo bills" served as bills of exchange, convertible into Reichsmark upon demand. MEFO had no actual existence or operations and was solely a balance sheet entity. The bills were mainly issued as payment to armaments manufacturers.
Mefo bills were issued to last for six months initially, but with the provision for indefinite three-month extensions. The total amount of mefo bills issued was kept secret.
Essentially, mefo bills enabled the German Reich to run a greater deficit than it would normally have done. By 1939, there were 12 billion Reichsmark of mefo bills, compared to 19 billion of normal government bonds.
This enabled the government to fund rearmament, and do so in a stealthy manner.
The run up in housing prices was fueled by a get rich quick mentality and easy money. Now that buyers understand that prices are going down and not up, all the cheap money by any name is not going to save us. Paulson can keep pitching but no one is catching. This is really getting scary!
Looks like a reasonable way to insure the originator is acting responsibly in making the loan. Basically they stay on the hook for the risk of default, but the same pooling of loans into an MBS occurs so they can replenish capital.
Funny how the DOJ dropped out of sight in monitoring fraud:
"That contrasts sharply with the punishment meted out by the DoJ to Merrill and CIBC, each of which not only paid $80 million in fines, but also agreed to have their activities monitored by a supervising committee that reports to the DoJ. Even more striking, CIBC agreed to exit not only the structured-finance business but also the plain-vanilla commercial-paper conduit trade for three years. No regulatory agency involved in the settlements would comment on the cases, though the SECs settlement with Citigroup took note of the banks cooperation in the investigation."
It's a delaying tactic which has been employed before by other means in other crisis but the point is clear, to allow the institutions that are involved to get back to profit (if they can or merge) whilst buying time.
Another "benefit" of these covered bonds is that the US government is ultimately on the hook. The banks like BAC are too big to fail, and the banks are directly responsible for the bonds, and the government is now directly responsible for the banks.
Joe, yes that's correct. It forces them to acknowledge that they have to have certain levels of capital to back the bonds in question instead of wiping it off their balance sheets and allows investors the chance to address the issue asap instead of digging thru all those legal entities that they created for the bonds.
Does anybody know how these covered bonds impact banks cap ratios? Do covered bonds allow the bank to "lever up" more than they would be able to by using deposits to fund the loans?
It is (yet again) avoiding the fundamental issue: Every party to a bond or mortgage must have major skin-in-the-game in order to prevent the various types of overselling/fraud that we've witnessed in the past few years.
This doesn't get solved until that factoid returns to the market.
I'm somewhat familiar with covered bonds, but I do not see any advantage that could be relevant in the current situation either. You would have to carve them out of the existing balance sheets, leaving the rest with less quality/higher risk.
The crucial aspect is that covered bonds require a sound basis; if the mortgages and assets are crap (think lax underwriting, overpriced real estate), the bonds will be crap too. Just like with securitization.
IMO it is just another attempt to 1. avoid facing reality by trying to turn a turd into gold by giving it another name, like super-SIV etc, or 2. milk the US taxpayer for a bailout in some way, or 3. (most likely) both.
Re: "reports suggest they are - or were - widely used in Europe. (italics added)" Thanks CR!!
New APS 120 applies to securitisation (as defined) and makes express provision for both traditional securitisation and synthetic securitisation.
However, it does not extend to the issuance of covered bonds comprising full recourse debt instruments that are secured by a cover pool (covered bonds). In fact new APS 120 specifically states that covered bonds are not permitted, or considered to be a securitisation (as defined in new APS 120) on the basis that they are inconsistent with the depositor preference provisions set out in the Banking Act 1959 (Cth
``At the moment, a bottom for the housing market is not visible,'' the IMF said in its Global Financial Stability Report, released today in Washington.
Worldwide asset writedowns and losses have totaled $469 billion in the past year and $345 billion has been raised.
London Banker on RGE monitor has an interesting take on covered bond, worth some thought.
Executive summary: apparently covered bonds come before FDIC insured deposits, what if a troubles bank, say WaMu, sold some of them to the usual suspects?
The Russians have already dumped half of their F&F garbage. I'll see if I can find an English version of the article. It happend preety fast. If the Chinese follow suit that would spell trouble. I don't know if there is any connection between what happend in Russia and "covered bonds", but it doesn't smell right.
Jimminee...
"Covered bonds allow for extension of credit to a bank SIV or trust that will be serviced by income from hypothecated assets on the bank's balance sheet. The assets stay on the bank's balance sheet unless there is a default on the bonds, at which time the assets are forfeit as collateral to the trust vehicle servicing the covered bond."
..Here we go again.
Soory, that was from: This Prudential Standard is made under section 11AF of the Banking Act 1959 (Banking Act). So the Aussies don't like them..
When structuring a new covered bond programme, itshould be possible to side-step this issue by separatingthe ownership of the asset pool from the issuance of the bonds. Subject to the requirements of the rating agencies, the bonds may then be issued by an existing bank or other financial trader in the originators group.The proceeds of the issue are then used either directly or indirectly to fund the acquisition of the initial pool of mortgages.Unlike in a securitisation, the bond payments are not necessarily funded by repayments under the mortgage pool, nor is the bondholders recourse restricted to the mortgage pool. This should mean that concerns about restricted deductibility of interest pursuant to Section209 of the Income and Corporation Taxes Act 1988 can also be avoided
Obama is having some public (surprise) economic round table and Volcker is right next to him... a chief advisor I guess. Think the bond market might be getting a little spooked by Volcker's presence ? I do.
ac, we're going to have one heck of a time pulling a Japan-style zombie bank "solution" for numerous reasons, not the least of which the US is a great debtor nation and the USD is the world's reserve currency. How can a USD carry trade develop (or maybe that's what $125 oil is about)?
On the issue of covered bonds, aren't they really talking about propping up the GSE debt with covered bonds to protect the Treasury from possible (inevitable) GSE collapse?
"The extra yield on covered bonds sold in Europe by Seattle- based Washington Mutual Inc., the biggest U.S. savings and loan, has jumped 13-fold since the sale two years ago to 3.16 percentage points over government notes."
Wow..3.16 above gov notes...US Banks must have zero credibility. And these rates are going to make mortgages rate cheaper?
Isn't there value in just opening up an alternative source of bank funding?
I think the European CB market is still (sort of) open, and that deals are getting done way tighter than senior unsecured bank debt or AAA RMBS (because of e.g., the double claim on the "cover assets" as well as the issuer's unsecured balance sheet, the overcollateralisation of cover assets to covered bond issuance, and the conservative LTV criteria that apply to the cover assets themselves).
Plus it's a format that European investors are familiar with - at times like this, US banks can only benefit from having as wide an investor base as possible.
Sure, in itself, it's not a "fix" - but I don't see that it can do any harm?
In simple language here, I think these four banks that are in collusion with Paulson, want to create a very small friends of Angelo club, which will be a non-liquid, non-regulated conduit to bounce bad debts around. This revolving substitution with various reference pools will once again bring about non observable assets that will be well beyond Level 3 accounting, i.e, there will no way for these friends to mark-to-market the toxic shit they are dumping back into treasuy -- but they will sell these CDO-like virus bombs to banks, i.e, banks that are in trouble will probably swap debt for bonds and then rating agencies who will be brought on board will rate this carp AA, then, as the banks continue to have trouble, this type of bogus collateral will explode again!
This mess is going to collapse: FDIC will be out of commission after WaMu failure and a couple others; Fed will soon be at the limits of its balance sheet; all of Treasury's ideas have been dead on arrival; Federal and state tax collections are plummeting; SWFs are once burned, twice learned now.
I honestly see no basis for sustained intervention; the wherewithal to finance such is just not there.
The next few years are going to be very interesting.
Broker writes:
The Russians have already dumped half of their F&F garbage. I'll see if I can find an English version of the article. It happend preety fast. If the Chinese follow suit that would spell trouble. I don't know if there is any connection between what happend in Russia and "covered bonds", but it doesn't smell right.
Broker | 07.28.08 - 3:33 pm | #
For every seller there is a buyer - so if Russians dumped who scooped it up? And at what prices?
That could part of the story is far more interesting than just the Russians exiting.
Hey, Kona Bullspam, on your 10th mention of the liquidity problems suspending European covered bond trading until Nov 26 do ya think you could get around to mentioning that's Nov 26 2007, was only for 3 business days, and has been over for 9 months?
If four banks are agreeing to "kickstart" a market for Paulson--what is their quid pro quo? What is Paulson promising them that he's not publicizing or that the MSM has decided it's best not to ask about? Gov't acting as the second/backup guarantor of bonds? Sorta like, "implied" gov't backing?
Covered bonds are a more honest version of securitization and do not introduce any new problems. For the tinfoil crowd, yes, covered bonds can be used for asset transfers from failing banks but that's no change because if the failing bank wants to collude with GS or whomever to give away assets at low prices they can do exactly the same thing with securitization or plain ol' asset sales. The fact that the markets are frozen up is irrelevant because it requires collusion, remember?
I'm surprised we haven't discussed the SEC chairman's goal of extending the new shorting rules.
WSJ: SEC Intensifies Efforts to Rein in Short Selling Regulators said an extension could be for as short as 60 days and could involve insurance, housing-industry and a broader range of financial stocks, according to these people. SEC Chairman Christopher Cox indicated last week the rules might be extended to all stocks.
I think the stress experienced by the CB market in Q4 '07 was more in relation to liquidity in the secondary market - like in most of the credit markets, bid/offer spreads gapped out with the increase in volatility; this was not such a big deal in ABS markets but it was a very big deal in the CB market, which until then had been ultra-boring.
My vague recollection is that the rules around market-making were relaxed - so that banks no longer had to make a market with a certain bid/offer spread (which may have been as tight as 1 or 2 bps).
I'm not sure that it was anything more than a market adjusting its practices to new developments?
dryfly, I don't know the answer, but I expected a big rally today for F&F.(as you can see it is not happening yet) All I am saying is the Russian and the Chinese were holding more than $500 billion of F&F garbage. If the Chinese panic, we might see some serious decline of the market in the not so distant future.
This is SIFMA-like financial manipulators that want to create a new product to sell and to use The Treasury, FDI, FASB and all the puppets to align all the stars, just as they did for the CDO markets, i.e, the little matter of Markit:
A private company with privileged relationships with 16 shareholder banks, Markit has unparalleled access to a valuable dataset spanning credit, ...
This absolute corruption and collusion for The Secretary Of The USA Treasury to be into this madness and using his ex-bankers at Goldman (et al) to pump this SHIT!
Covered bonds would bring to banks the same issues that are going on now in small-and mid-cap public companies with "secured lending."
Hedge funds are loaning these companies money at high rates (12-16%) secured by specific company assets. The loans usually are for terms of 1-3 years and almost always include warrant or convertible kickers.
The problem will be when these loans come due and default, and the borrwers find that a piece of equipment sitting in the middle of the shop floor now belongs to a hedge fund. Small companies are hocking the shop to get access to money.
Covered bonds won't automatially get a low interest rate or a long term. And they could drive up the bank's cost of unsecured credit, because you're inserting secured creditors between them and the bank. It's a pretty desperate move. Shows how bad things are.
What a charade! Clearly a demand performance for bank leaders. Wonder if they were handcuffed behind their backs? Wish I could do the cartoon.
If CBs were more profitable, BA, WAMU and other banks would be printing them, but it's not profitable enough, so Pauliano is muscling them to do something they haven't wanted to do on their own, using some yet-to-be-determined money lending scam to be paid for ultimately by guess which taxpayers.
This rush to re-constitute the dying mortgage industry in one week tells me the GSEs' may be deteriorating faster than publicly known.
Paulson said covered bonds were "a promising financing vehicle" and the market could be developed without any federal legislative action being required.
I think everyone missing the big picture sometime. The purpose of Covered Bonds is to confuse everybody. The worst thing to have in a panic is a direction and momentum. His statement today was to add enough confusion about a possible solution to prevent a slaughter. Another black day for banks
The news on Friday from National Australia Bank id the only news and anything they can put out to confuse people or have them not understand helps to prevent a meltdown.
They are in denial. They are dead, and dont know it yet.
Unless you go back to making loans to people who cant afford it, with the bubble mentality of getting rich overnight by buying a house, the housing market will keep falling until houses are affordable.
2.5-3x annual income is where houses need to be, but mcmansions never were as people bought more house than they needed or could afford. Huge losses will be taken regardless as the market for overpriced, overly nice homes for people that wanted to pretend they had money to throw around has dried up.
Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate
in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the [public] bank.
You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that
is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.
--president Andrew Jackson, 1832
[Statement to a delegation of bankers who were lobbying for the Bank Renewal Bill of 1832]
Won't be the Chinese who bail on treasuries.....will be the Saudi's. The Chinese have to much to loose. The Oil producers don't. We will still buy their oil......even if it take Mugabe currency.
The distressed trading levels in both investment-grade and speculative-rated bonds "suggests that we will see record-sized bankruptcies by volume into 2009-2010," said Christopher Garman, writing in high-yield research publication Leverage World.
Including both high-grade and high-yield issues, about 7.5 percent of total corporate bonds are trading at distressed levels, pointing to nearly $97 billion of defaults through 2009, Garman said.
That level of distress is the same seen during the credit downturn of 2000 to 2002, a period when the largest corporate bankruptcies on record were filed.
About 23.5 percent of the U.S. junk bonds S&P tracks were distressed in July, up from 13.7 percent in June, the agency said in a report on Friday.
Rob Dawg writes:
Loans backed by specific assets held as collateral? We used to call these facilities "Pawn Shops." Now we can call them "Pwned Shops."
All Fall Down writes:
News headline for all you naysayers. The Dow managed a late rally to close off the session low (6 points is 6 points!!!)
All Fall Down | 07.28.08 - 4:10 pm |
LOL! You're so right. Now CNBC, Bloomberg, etc. can happily announce that while the market got creamed, it did manage to close off the lows of the day! Go Bulls! The start of the next leg of the great bull market!
Following up to my own post -- if a bank is allowed to sell the value of an asset -- while simultaneously keeping it on the balance sheet -- does this mean that banks can use covered bonds to get around their statutory capital requirements?
Look, the Chinese announced today that they'll keep buying Agencies regardless so that they can keep their currency down...so let's do indeed shove these lemon mortgages into Agencies. The Chinese don't care...
BB writes:
"IMF Says End of U.S. Housing Slump `Not Visible' "
Foreclosures rising faster than bank REO sales, causing increasing bank unsold inventories now over 10 months at June sales rates, are very visible on my daily tabulations, and the ending of the summer buying season won't help.
Russia held about $100 billion in U.S. agencies Freddie, Fannie and Federal Home Loan Banks at the start of 2008, as part of its now near-$600 billion reserves, although over 80 percent of the holdings were due to mature within the year. "It's now less than $50 billion," central bank first deputy chairman Alexei Ulyukayev said.
"As we're all aware, the availability of affordable financing is essential to turning the corner on the current housing correction. So we've been looking broadly for ways to increase the the availability and lower the cost of mortgage financing to accelerate the return of normal home buying and refinancing activity."
What is Paulson's definition of "normal home buying and refinancing activity"?
Later he mentions that this isn't a "silver bullet", but is a great example of innovation in the market. That's what we need, more innovation.
Our previous crack supplier dead, we need a new one.
You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that
is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.
See, bankers are smarter nowadays. They give the politicians a cut.
We will be set up to cash your covered bonds for merchandise in a few days, along with social security checks and welfare checks. There will be a $2.50 charge/hundred.
From Londonbanker.com:
"Covered bonds will be used to render profitable assets off soon-to-be-bankrupt corporates, leaving pensioners and other creditors with the stripped carcass in the liquidation."
Couldn't something like this happen to Countrywide leaving bond holders with a bankrupt shell with no assets ?
The bonds have been used on a limited scale in the U.S. since 2006, after introductory offerings by Seattle-based Washington Mutual Inc. and Bank of America of Charlotte, North Carolina.
Well then, that settles it. Sign me up!
No, wait, scratch that. As a taxpayer, I guess I'm already signed up.
"As we're all aware, the availability of affordable financing is essential to turning the corner on the current housing correction. So we've been looking broadly for ways to increase the the availability and lower the cost of mortgage financing to accelerate the return of normal home buying and refinancing activity."
I get the feeling that these guys don't know what to do.
"Forgive me for being dense, but what precisely is the Treasury's role here"
That's a good question. I think nothing. The role of the Fed will be outsourced to BlackRock. BlackRock will take care of everything from here. Fancy name.
Taking a cue from the grim economy, this fall's fashions at Banana Republic, Gap and H&M are featuring a distinctly Depression-era trend of cloche hats, pencil skirts, conductor caps and baggy, vintage-style dresses.
Al Thompson, 40, a senior employee at a recruiting company, hates the look - it covers far too much for his taste. He also predicts it won't last.
"Everything in fashion and economics is cyclical," he said. "This fashion has returned just as we're hitting a point in our economy much like what we faced in the '30s."
The term "silver bullet" was used multiple of times by Paulson and another representative. I'd be more specific, but I don't want to watch it again.
I thought the same thing about the undead. By using the term "silver bullet" they admitting that they are dealing with something that is undead. Kind of funny, but not.
Or the better explanation as Temporarily Out Of Cannabis puts it, they are looking for some more Coors Light. That would go along with Bush's statement the other day that Wall Street "got drunk" and is hungover.
Anon 5:21: The Depression era clothes were rad, dude. I have been hoping for years that we would all start wearing those sweet hats that dudes wore back then. Even poor people looked prestigious.
Gentlemen, I think you are missing the point here with Covered Bonds. Yes, they stay on the bank's balance sheet UNTIL they default. Then they are delivered to the trust and come off the bank's balance sheet. Can you spell 'no recourse' loan, deliver the mortgagues, debt paid! Never goes down, never marked down, just delivered- worst case. A perfect solution--for the bank. Better you loan an individual the bucks on a deal you personally know is OK.
I am a German and in Germany covered bonds are known as "Pfandbriefe". They have been around for decades and are favorites for institutional investors because of their safety and yield (slightly above German government bonds - known as "bunds").
Why are they so safe ? There are at least two reasons:
a) In Germany it is illegal for a bank to make a loan - incl a mortgage - without requiring the borrower to lay bare his financial condition, i.e. salary, employment, assets, tas return, etc. It is laid down in a law (KWG, para 18).
b) A covered bond that rests on mortgages can only use a mortage up to 60% of the market value of the collaterized property.
Banks rarely provide mortgage that are higher than 60% (they could but they don't). Usually, the borrow makes a 25% down payment (or even 30%). This is the key reason why German homeownership at 40-45% is much lower than in the US despite a constant savings rate of 8-12%.
Many Germans who rent could buy but do not (and instead invest in stocks and bonds and allow capital formation in the real economy instead of wasting money oversize houses which in economic terms in overconsumption).
And many Germans who want to buy a house can not because they do not have that 25% down payment.
It is therefore very important to emphasize the 60% cap on mortgage against market value.
Underwriting rules by law and the 60% are paramount. Otherwise this will end as badly as MBS mortgage backed securities.
Debtors have also access to the issuing banks balance sheet. There is a reason why US banks have not followed this well-regulated trust inspiring route from Germany.
It would mean serious lending standards and a serious effort to actually be responsible for the mortgage and carry risk and hence it would herald a return to developed country lending standards.
Curiously, the market was down 1% before the Paulson speech today and then down another 1% during and after his speech. It was the first time so far that I Paulson speech did not assure / calm / inspire the market. This is a good sign.
Adult analysis is now replacing disneyland thinking. Lending standards are stil slow to return: When banks demand only 5% downpayment in a market where house prices are sinking 15% year-over-year you know that this fiesta is not over.
The increase in renters in the US is an involuntarily but beneficial boost to savings and capital formation. So there is bright side if one is prepared to see it.
ac writes,
"Because they don't have a stigmatized name (yet)."
Too true. I call this the Rambler syndrome, although it goes back to Nash and maybe even further. A company turns a product into crap, and instead of improving the product hangs a new name on it. Thus, Rambler got a reputation for making crap and became American Motors which got a well deserved reputation for making crap and so it was morphed into segments of Chrysler, etc. etc...
"Taking a cue from the grim economy, this fall's fashions at Banana Republic, Gap and H&M are featuring a distinctly Depression-era trend of cloche hats, pencil skirts, conductor caps and baggy, vintage-style dresses."
We've got a shop in town called New Deal Clothing that carries nothing but such stuff.
I figure, why the heck not? It's a college town, with young people alreadywearing retro gear that harkens back to every decade back through the forties swing and zoot styles. What's ten more years, to fashion?
Nice work Kottan. I was just rereading the paulson piece...just strikes me as so much desperation and nothing else.
The facts :
this type of security is already poo with investors in Europe where the market is established.
It's tiny here, so yes, it WILL show huge growth rates if anything changes. BAC etc will be sure to tout that as a savior. Remember your growth from small starting values fun with numbers.
The types of loans that could be bundled are going to be of the quality that FNM and FRE would already be doing. And if they arent somehow capable of doing it, what exactly is this saying about those two gems? Says they are junk and basically broken and can't function.
So now, other crippled banks are going to take more bad loans? I doubt it. The underwriting standards, as Kottan points out, still make more losses in a market like this. They wont be able to stave off price declines because there is a growing pile of REO that is going to force the same lenders to push down prices while it tries to revive the market, this settign off another leg in the banking crisis.
This is just so stupid - no wonder the market didnt buy into it today.
Can you spell 'no recourse' loan, deliver the mortgagues, debt paid! Never goes down, never marked down, just delivered- worst case.
Bzzt, wrong, thanks for playing. Again from the Bloomberg coverage, or any coverage if you bother to read it:
Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay.
I still wonder what Treasury's role here is supposed to be. The article says they are issuing "best practices guidelines". As if our largest banks do not already know how to make, you know, loans...
OK I guess I see how one might question that based on the past five years. Still, if Treasury is involved, then these new instruments presumably create some new mechanism to deliver my tax dollars to these banks. What is it, exactly?
There must be an easy way to transform a covered bond into a Level 3 asset
Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present form. Some may not survive in any form.
Kottan: Thank you for the perspective. Why do you think that Germany and other european countries stayed so conservative while we pushed enough "candy" on ourselves to make us sick? Do you think that the long term interests of your government are more in line with those of your citizens than ours, for instance?
I can't help remembering that securitization of mortages was invented in Germany, and that a ground rule for using this invention was also a very conservative loan to value ratio.
Please explain this:
"Banks rarely provide mortgage that are higher than 60% (they could but they don't). Usually, the borrow makes a 25% down payment (or even 30%)."
Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. threw their support behind Treasury Secretary Henry Paulson's effort to spur covered bonds as a new source of mortgage financing.
``We look forward to being leading issuers as the U.S. covered bond market develops,'' the banks said in a joint statement in Washington. They applauded Paulson's release today of guidelines for issuers of covered bonds, which detail the types of loans that should go into the securities and how their payments ought to be made.
The banks stopped short of announcing specific plans for issuing the bonds, illustrating how the market may be slow to take off in the U.S. in the aftermath of the mortgage meltdown. Even in Europe, where covered bonds are a market in excess of $3 trillion, investors are shunning the debt amid a collapse in appetite for investments in housing.
``Mortgage-backed securities investors are not in the mood right now to buy bonds with anything less than government backing,'' Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in an interview, referring to debt guaranteed by Fannie Mae and Freddie Mac.
`Paves the Way'
Bank of America Treasurer Jeffrey Brown said in a separate statement that ``today's announcement paves the way to substantial growth in the U.S. market.''
Federal Reserve Governor Kevin Warsh backed Paulson's plan to support covered bonds, highlighting that the central bank would accept them as collateral at the discount window for direct loans to commercial banks.
The bonds have been used on a limited scale in the U.S. since 2006, after introductory offerings by Seattle-based Washington Mutual Inc. and Bank of America of Charlotte, North Carolina.
Nemo:Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay.
spip....
Please remember, the banks are the Servicing Agent. They can make up any shortfalls UNTIL it ceases to be profitable, then they call DEFAULT, DELIVER the mortgagues and are gone. Please, be my guest and buy some of these. Or, you could just read the prospectus and find out what they really are. Not to be snide (OK, I am) after about 40 years in the Banking business, I probably have forgotten more about covered bonds than Bloomberg reporters will learn in the next 40 years. But, please, buy some. Buy a lot. They are like gold. Can't loose! And of course, your 'trust' company will always be true to you and not the bank that chartered them, guaranteed! Never fails. Put you retirement in them. Guaranteed!
This might be mentioned somewhere, but I couldnt' tell from the article(s) if they were talking about issuing the new bonds based on new pools of new mortgage originations, or if this is meant to repackage all of the existing junk? Sorry Kona if you answered this, but I just couldn't keep up.
Shanondoah: One would hope. But if so, I wonder how large an enterprise that will be in the next few years considering hardly anyone who wants to buy a house has any cash. 25%? 30%? 40%? More like -2%.
These covered bonds will be triple A rated by Moody's, S&P and Fitch and insured by Ambac and MBIA, so relax, these are safer than CDOs and they have been around for over three centuries, relax, trust us, drink more vodka!
Re: The rise of the Pfandbriefe market, particularly after the passage of legislation in 1900 codifying their usage, encouraged the creation of generally state-owned bodies specializing in this financial product. The Pfandbriefe segment became particularly important in the early decades of the 20th century. The rapid rise of industrialized production techniques had in turn created a surge in the urban population, stimulating a need for new and affordable housing for the growing working class. The economic and political upheavals of the post-World War I era made the Pfandbriefe and their relative safety particularly attractive.
Kona, you and me... WE are going to start our own ratings company. Let's call it just "Moody" or "Standardly Poor"
We can create a bomb proof bunker with thick glass ceiling -- no one will be able to get in to influence our ratings, but we'll be transparent enough to inspire confidence. There should be a little tip jar connected to one of those long vaccuum tubes so people can show us their appreciation if we're doing a good job. No tips over $500,000 so that everyone understands there's no quid pro quo.
Speaking of nazis, can yah take covered bonds to The Discount window as collateral -- I mean, could yah in thepst, like does Wamu or BAC (trick question)?
Does Europe allow such easy access to a Fed-like window, in regard to the junk bonds, I mean covered bonds they spin off; does this mean we will have a Level 4 thing with FASB, i.e, like totally unobservable and totally unaccounted for...
US covered bonds structure: The first of the US covered bonds came from Washington Mutual (WAMU) , the largest S&L in North America. WAMU is itself a prominent issuer in securitization market: the fact that it thought of entering the covered bonds market is quite significant in itself. The US structure does not use either true sale or guarantee from any special purpose entity. In fact, the transaction is based on a simple pledge of assets to a bond trustee. S&Ps rating report for the WAMU transaction says: In U.S. structured finance transactions, an FDIC insured bank may grant a perfected security interest in collateral, and the security interest, subject to certain conditions, will be enforceable against the bank and its receiver or conservator notwithstanding the insolvency of the bank
Uncle Billy: Germany tends to use the 'Merchant Banking' model which says "never, never loan more than 60% of the value of Anything". (same model we use) This model tends to make covered bonds OK, if the 'trust' company turns the mortgagues over to the holders IMMEDIATELY. This allows you (as a holder) the ability to forclose, take the property and immediately resell or rent it. If the whole process is left in the hands of the 'trust' company, well, the whole process is a guess! Some trust companies are great, some suck. The rule of thumb we use is-- trust yourself, first, last and only. Who knows, americans tend to be really lazy and stupid (INHO) and will probably get screwed on this mess, although the ideal is sound.
Uncle Billy vs. Mt Pelerin (hello von Hayek fan):
you asked : Where's the other 10%-15%?
(When 60% is the mortgage cap LTV for covered bonds and 25% is the down payment). The source for the remaining 10-15% often come from a so-called "Bausparkasse" ("construction loan bank") which offers a multi-year savings plan with low interest rates against the promise for a second lien mortgage with low interest rates.
I do not want to overly bash America but I am just shaking my head about the extent of the capital depletion and misallocation of America's wealth. It is not only residential real estate. When you read the reports about CRE commerical real estate and the overreliance of regional and local banks then you can come to the conclusion that big banks lend money through cash--out refinance and HELOCS to borrowers who send sleepwalk to the next mall to do "recreational shopping" (James Howard Kunstler). This can not be a sustainable way for a country for this great potential.
I recommend all who are interested to familiarize yourself with James Kunstler (http://www.kunstler.com) and his two boooks "Geography of Nowhere" and "The Long Emergency" where Kunstler describes the shortfalls of suburbia as a unique and wrong living arrangement and in his second book the world when oil production has peaked and the havoc it will create on a country - the US - where half of its population lives in suburbia.
I earnestly believe, too, that the US has entered a phase of transition with high gas that will force it to enter other living arrangements that a huge portion of its housing stock will be worthless because it will be abandoned.
Look at this country ! It had sane thoughtful small and regional banks and for long periods (1947 to 1975 and 1991 to 2003) rather stable lending conditions and "normal" bubbles (exceeding inflation path by 20-25%, normal breathing, not dramatic).
Why the year 1947: As Kunstler pointed out, this is the year after the movie "It is a wonderful life" with James Stewart was released. Most Americans watch it as a simple touching upliftung movie - which it is. But in retrospect it is also a very programmatic movie since it depicts the urban center of Stewart's hometown as full of vices and the green grasses of the suburban houses to be built for god-loving families as the place of virtue. Again, the release date was 1946. This coincided with the conviction of Americans to abandon their cities - and their neighbors.
Matters were not helped by the government after the first (1973) and particularly after the second (1979) oil shock when Nixon and then Reagan decided to cut loose the manufacturing sector and bet on services and then (since the 1980s) also on the financial sector - tellingly called "industry" in a vain attempt to simulate core activity.
In Germany, Switzerland and Japan the manufacturing sector is still 30% of GDP after all these years and yet Germany consumes 2.5m barrel a day with 80m people against 21m in the US with 300m people and manufacturing sector that is 12% (!) of the GDP - and financial sector that is 24% (twice as high !). In Germany, the financial sector is at less than 10%. How is master in your economy - and who should it be ?
Historically, such distortions are sad signs of a late concluding chapter of a phony boom. Germany had had phony booms, too: 1918-1923 and 1933-1939. Both periods ended in hyperinflation (1923 and 1948).
Kevin Philipps has written that the closest analogy to the hyperfinancialization of the US economy can be found in 16th century Spain - which lived off a phony gold and siver boom after 1500 - become the darling borrower of German, Italian and Dutch merchant banks, lived in luxury without a real sector and collapsed shortly after 1600. Spain was so thoroughly depleted that even two hundred years later it missed entirely out the Industrial Revolution.
I truly like America - too many non-liars and true savers have purchased houses in the previous years only to be sunk by liar neighbors and complicit banks - smart regulation is a public good.
Perhaps it is no accident that public goods and social fabric and notions of governments providing useful services (e.g., regulation) declined in robust correlation with the suburban build-out and its corrosive effect on social cohesion.
An economy can not be run on "financialization". Americans will rebuild their country with savings, more labor-intensive work (farming will see a renaissance) as will small and mid-size communities. It will be a (much) lower living standard - apparent by 2012. But the joy of life in communitiy, proximity and cohesion will more than compensate.
America needs to bid farewell to high homeownership - 70% is too high; even 60% is too high. It was 50% until 1945 and tellingly America had better infrastructure and a higher share of a manufacturing sector than today.
Less "services", less financials, more real sector, more farming.
I understood that part, IB. Just didn't get the part where Kottan says the bonds are based on mortgages with ltv no more than 60%, but on the other hand says that downpayments are in the 25-30% range. I'm looking for the extra 10%-15%. Where did it go?
That was given to me as a gift by someone that thought this was Ms Bair from FDIC, thus I had no way of knowing anything about this or that, so, it was just serendipity, and I'm still really freaked out by it...
As for the rating agency, we can negotiate, but maybe a name like UB Kona, or UBK @ CR
These are mild hints, and I must further offer apologies, as I have been highly distracted today and have not had any time to go over any of this, and my posts on cover bonds have been highly lacking in detail, thus, in a few hours or so, I'm "all in" and will dig much deeper!
Many thanks also to CR for amending the opening mention to the europe comment, which is obviously part of the current marketing campaign of mis-information, i.e, to suggest this a great security vehicle that has been making german beer safe for over three centuries -- not so, don't fall for that!
Bank of America sold $2 billion of five-year covered bonds in June last year that were rated AAA by Moody's Investors Service, Standard & Poor's and Fitch Ratings. The debt was priced to yield 49 basis points more than Treasuries, less than the spread of 70 basis points that the bank's $500 million of senior unsecured bonds due 2012 were trading at. The spread on the covered bonds quadrupled to 201 basis points as of yesterday, according to Barclays Plc. A basis point is equivalent to 0.01 percentage point.
Sales of covered bonds dropped to 17.8 billion euros ($28.3 billion) in June, the least in six months, as investors demanded the highest rewards on record to hold the debt, according to data compiled by Bloomberg. The average yield climbed to 83 basis points over similar-maturity government rates, from 26 basis points a year ago, according to Merrill Lynch & Co.'s index of covered bonds outside of Germany's market, where the securities are known as pfandbriefe.
Covered-bond prices have fallen 2.5 percent this year, according to Merrill index data.
Prussian Farmers
The bonds date back to the 1770s, when they were used in Prussia to finance agriculture, according to the European Covered Bond Fact Book. Trading in the market for the securities was shut down for a week in November to ``avoid undue over-acceleration in the widening of spreads,'' according to the Brussels-based European Covered Bond Council, which represents banks and borrowers.
Can 2007 match 2006, a vintage year for covered bonds? With the technique spreading around Europe and, of course, the US, expectations at the beginning of the year were high that 2007 would be the biggest yet. Lonely WaMu
The US, which contributed Eu4bn to the late rush of supply from new entrants in 2006, is another unknown quantity that has already undershot early forecasts. Washington Mutual had said that it would probably access the market on a quarterly basis, but disposed of $18bn of mortgages and sold $5bn of mortgage backed securities at the end of the fourth quarter, reducing its funding needs for the last quarter of 2006 and the first quarter of this year.
WaMu expects to return to euros in the second quarter and could be joined by Bank of American and Wachovia around that time, with Countrywide potentially entering the market later in the year. However, new programmes are always subject to a certain degree of uncertainty and few analysts are forecasting US volumes for 2007 with a high degree of confidence. (see US issuers chapter on page xx for more detail on their plans.)
Swedish issuers hit the ground running when they entered the market in October, but after a brisk start to the year when all three tapped the market, they are unlikely to continue at such a pace. Their plans suggest that only one further issue is likely from each this year, although the cost of the basis swap from euros to Swedish kronor will be a key determinant of supply, and only Länsförsäkringar is expected to join in the near term. (See chapter on page xx for more on Swedish issuers.)
Three of the covered bond markets smallest jurisdictions could double in issuance volumes in 2007: Austria, Finland and Portugal. In Finland, OKO Bank is considered a likely candidate to join Sampo in using covered bonds.
With Bawag still absent from the covered bond market following its troubles and change of ownership, Kommunalkredit Austria has been the only jumbo issuer from Austria since June 2005. However, the Austrian Landeshypothekenbanken are losing their state support in April and have made clear their desire to use covered bonds as a funding instrument in future in a similar manner to Germany's Landesbanks after the loss of their state guarantees.
The global covered bond market which was estimated to amount to 1600 billion euro at the end of 2007 is concentrated in Germany (Pfandbriefe) with 47.1 p.c. of covered assets, France (obligations foncières) accounting
for 12.8 p.c., UK (contractual covered bonds) for 12.3 p.c. and Spain (cédulas hipotecarias) for 10.8 p.c. The resilience of this market to the current market shocks has been uneven and dependent on jurisdictions, with a
temporary suspension of market-making by the European Covered Bond Council in November 2007. While the German market has resisted well, the UK market suffered, with some banks being temporarily unable to raise funds.
Part of the explanation could be that covered bonds in Germany, France or Spain are issued under special legislation, while in other countries such legislation is lacking and the double investor protection is only provided
by contractual arrangement. But even when such legislation is in place, markets may discriminate between jurisdictions. So, in Spain, the spreads between mortgage notes and Spanish government bonds widened during 2007, while in Germany the corresponding spread between Pfandbriefe and German government bonds remained stable.
Of course, covered bonds can only partially fill the role of ABS. For a start, assets remain on banks balance sheets.
Moreover, covered bonds generally pay fixed rates and have bullet maturities which may reduce their attractiveness in countries with substantial mortgage prepayments (like in the UK, Ireland and the Netherlands).
An important caveat is that the largest part of interbank transactions is contracted for a much shorter duration than 3 months, so that these rates are not necessarily representative of rates that banks actually have to pay to get liquidity. Indeed, according to the ECB Euro Money
Market Survey, about two thirds of the transactions in the unsecured interbank market are overnight while almost the whole remaining portion has a maturity of maximum
1 month.
WOW, these bitches could use a shitload of covered bonds!!
Merrill Lynch & Co., in a broad move to clean up its troubled balance sheet, said Monday it will sell a big slice of its asset-backed securities and issue new stock to raise $8.5 billion of fresh capital.
Kottan: Land, no. I wish. I would have a steep learning curve though even if I did. I worked for a few years on someone else's farm for a few years, but if left to my own devices, or my wife's, we would probably go hungry. My ancestors proved that we have a genetic problem in regards to farming.
No. Big deals requiring large amounts of structured debt have taken a big hit," says Francois Ortalo-Magne, an associate professor of real estate
The curve made a lazy push steeper with the 2-10-yr yield spread heading out at 143.5. The dollar picked up a bit of bid post-Paulson press conference but trade is fading the move at the close
Stolen from the internet, some web page, I just clicked and got this:
Essentially, covered bonds would shift the residential credit risk away from Fannie Mae and Freddie Mac, and toward the structure of the covered bond (assuming some form of credit enhancement like over-collateralization)and the bond buyer.
Firstly, banks issuing the covered bonds have to keep the loans on balance sheet. The biggest problem right now for banks is maintaining their capital to balance sheet ratios. Issuing covered bonds is fine for funding, but bad for capital.
Secondly, U.S. banks want what their European counterparts have; specific legislation defining what a covered bond is and how it will be treated by regulatory authorities. Right now we don't have that.
Thirdly, and most importantly is, I just can't imagine that the secondary market liquidity for covered mortgage bonds can get within a mile of the liquidity of Fannie Mae and Freddie Mac mortgage backed securities.
Agency backed MBS trade in the secondary market with a bid/ask spread of 1/32nd of 1% in volatile time like now. In normal times they trade with a bid/ask spread of 1/64th of 1%. They are arguably the most liquid bonds in the world. They have their own clearing corporation (nearly an exchange) and have very well defined good delivery standards, which allow them to trade TBA. They also have a very liquid funding market known as the dollar roll market. And even with their own clearing corporation and the well defined TBA market, trading and settling agency backed MBS is a incredible labor and capital intensive operation. Can you imagine if instead of Freddies and Fannies, dealers would have to trade and settle the covered bonds of 100 different banks? Never going to happen, at least without those securities trading points behind Fannies and Freddies.
And there is the rub. If covered bonds trade way behind Agency MBS (meaning if Agency MBS trades 100-00 then covered bond trades 98-00) , then that's terrible execution for the bank trying to sell his loan production into the secondary market. That means the bank is going to pass that bad execution on to the borrower. So if right now a bank would set a rate to a borrower for a 30-year fixed-rate loan at 6.75% to get paid par (100-00) in the secondary market as a Fannie Mae security, he would have to charge the borrower 7.50% or more if he put the loan into a covered bond. That's a HUGE cost to the prospective borrower.
I'd like to thank everyone for coming to the Covered Bond tent and reading some of the literature and looking at a few of this mornings hand outs. Kona will be back from the bathroom in about an hour and then the evening performance will begin, with free vodka and snacks...
"The FDIC is concerned that unrestricted growth, while the FDIC is evaluating the potential benefits and risks of covered bonds, could excessively increase the proportion of secured liabilities to unsecured liabilities," the agency said. In other words, Back off my insurance fund. The agency did say it would consider revising its guidance after it has a chance to evaluate the effect of covered bonds on banks.
1974 schrieb Helmut Zenker die erste Kriminalgeschichte um den Wiener Polizeimajor Adolf Kottan. Als Hörspiel wurde diese Geschichte gemeinsam vom ORF-Landesstudio Niederösterreich und dem SWF produziert[1] und im Frühjahr 1976 gesendet. Im selben Jahr wurde vom ORF auch ein Fernsehspiel produziert (Hartlgasse 16a), das allerdings Kontroversen über die Art der Darstellung der Polizeiarbeit hervorrief, vor allem seitens der Polizeigewerkschaft.
At December 31, 2007, loans totaling $84.83 billion, $10.49 billion,
$9.09 billion and $8.59 billion were pledged to secure advances from FHLBs,
preferred securities issued by an indirect subsidiary of the Company, borrowings
issued under its covered bond program and other borrowings.
At December 31, 2006, loans totaling $58.95 billion, $7.28 billion,
$6.25 billion and $2.62 billion were pledged to secure advances from FHLBs,
preferred securities issued by an indirect subsidiary of the Company, borrowings
issued under its covered bond program and other borrowings.
In September 2006, WMB launched a $20 billion covered bond program intended
to diversify its investor base, lengthen the maturity profile of its liabilities
and provide an additional source of stable funding. Under the program, the
Company may, from time to time, issue floating rate US dollar-denominated
mortgage bonds secured principally by its portfolio of residential mortgage
loans to a statutory trust not affiliated with the Company, which in turn will
issue Euro-denominated covered bonds secured by the mortgage bonds. At
December 31, 2007, $7.74 billion of covered bonds were outstanding. Under
current program covenants, due to recent downgrades by Moody's and Standard &
Poor's, the WM Covered Bond Program may not issue additional covered bond
series.
Includes $7.74 billion and $5.05 billion of covered bonds that were
outstanding at December 31, 2007 and 2006.
As of June 2006 FHLB loans to WaMu were $55 billion, 16% of its assets. Lessening its dependence on FHLB is a continuing aim at the bank. Because finance provided via FHLB is typically less than three years, banks that use the system are building in an asset and liability mismatch because mortgages are long-dated.
Government-sponsored enterprises are an important source of liquidity to mortgage markets by making loans against mortgage portfolios. But in recent years there have been a lot of negative headlines about Fannie and Freddie; against that backdrop it makes a lot of sense for banks to diversify their sources of funding. The problem banks had was that it was virtually impossible to match FHLB rates.
Re (OT): Sub-inspector Krishna Murari of Parsudih police station confirmed the arrests of two smugglers. He also confirmed that around 250 cows were freed from the clutches of the accused today.
Murari, the officer in charge of Parsudih police station, however, expressed his displeasure over the modus operandi of the GRS members. Members often take law in their hands and intercept the smugglers on their own, instead of informing us. The GRS act as law, he said. The officer said despite arrests, a number of cattle smugglers go scot-free after receiving bail.
First, covered bonds are pure funding tools. There is no capital benefit whatsoever. The point of encouraging them is to clean up banks' balance sheets or funding ratios, but to give them an alternative, funding source that is cheaper than securitisation or unsecured bonds.
Second, from an investor's perspective your first recourse is to the bank, and then to the assets. By definition, covered bonds are at least as creditworthy as the banks issuing them. If every single mortgage originated by the bank defaults, then covered bondholders still have as much chance of being repaid as any other bondholder of the bank.
Third, wherever covered bonds have been legislated, there have been strict limits on how much issuance banks can do, in order to avoid damaging depositors. Typically it's 4% to 10% of total liabilities.
Fourth, the interesting question is what the eligibility critieria will be in any US legislation. There's little point in duplicating Fannie/Freddie criteria, since that funding will almost inevitably be cheaper. But the criteria in other countries are broadly similar (absent FICO scores), for example maximum LTVs of 80%. The trick will be to shape the eligibility criteria in such a way as to a) provide a decent amount of eligible assets, b) ensure their quality to attract/reassure investors (and a AAA rating), c) avoid duplication of the GSEs funding capacity.
Oops, I made a few typos. The first paragraph should read: "The point of encouraging them is NOT to clean up banks' balance sheets or CAPITAL ratios, but to give them an alternative funding source..."
The difference between the European and the American approach seems to be that in the US there will be no legal definition of a Covered Bond. The regulators will know it when they see it.
If a bank sells one of these and the bank fails then the taxpayer, via the FDIC, is on the hook. But since there is no legal authority to externally guarantee that the contents of the bond really are safe enough to deserve to be covered they might look no different than current debt acquired and put into bonds.
Rather than change the rules that led to so many bad loans, the Paulson apparently just wants to change who gets hit when the bonds backing a Wall Street bank are at risk.
It seems reasonable to assume that by the time Paulson, Bernanke, Bair and Cox are done all possible risks to Wall Street and their investors will be covered by the taxpayer.
The F.D.I.C., which takes over failed banks, promised to respect the terms of the bonds, so that bondholders would be repaid from the value of the mortgages, even if other bondholders in the failed bank suffered major losses.
Covered bond markets exist in many European countries. In some of them, laws make the legal standing of such bonds clear, but Mr. Paulson and the other agencies concluded that no legislation was needed, and that policy statements by regulators would suffice.
It is expected that Bank of America will be the first issuer. Bank of America has issued such bonds in Europe, and did one $2 billion American offering of covered bonds in June 2007, before antipathy to mortgage securities intensified.
snip
Antipathy to mortgage securities or mortgage securities from specific banks?
1st?
that was me
I'm so quick
Geez, I never knew free-market capitalism needed so much prodding and pushing from government.
Something tells me that any solution requiring Paulson to suggest, encourage, and promote isn't really one.
Europe already uses these.
Europe's economies are imploding as well.
So how exactly will this "fix" anything?
Is that "are" or "were?"
"...purchasers of the bonds have a direct claim on the issuer's balance sheet."
Anyone think this will be attractive to bank's? I think what they really want is to get things OFF the balance sheet.
Any astute Canadian want to chip in? Is this similar to CMHC ?
How is this different than a bank making a loan and keeping it on its books (how it was done prior to securitization)?
About time for the Treasury, SEC, FDIC, or the FED to do someting really stupid on top of what CONgress just did. Hope they don't presss the wrong button boys and girls. It might go BOOM!
OT to Old Trader/Previous Thread:
Thanks for the info re small cap.
There is a perfectly good reason for this: privatize profits, socialize losses.
London Banker: What's up with the covered bond push?
Re: they are widely used in Europe.
Not really, do your DD!
Mo: I think it is different because the banks don't have any money to lend us. If they did, they probably wouldn't need someone else to front it.
Covered bonds will skim off the cream because that is the only thing that will sell. Banks will become shells.
CR,
I'm not very familiar with covered bonds, but they are widely used in Europe.
Covered-Bond Push, Fannie-Freddy, Fuld: Compliance
Covered-Bond Push, Fannie-Freddy, Fuld: Compliance (Update1) - Bloomberg.com
July 22 (Bloomberg) -- Treasury Secretary Henry Paulson's plan to revive U.S. mortgage financing depends on investors buying the same kind of bonds they're shunning in Europe.
They Were widely used in Europe.
How do covered bonds allow US consumers with strained budgets and wrecked balance sheets to purchase houses that are still very expensive by historical standards?
Or is this just more the kind of scam innovations that got us in this mess to begin with by hiding the simple fact that all these new securities are just methods for getting people to take on bad debt without realizing it?
It sounds like Paulson has found a new way to turn lead into gold.
Where do I sign up?
I'm confused.
Why do these banks view covered bonds more attractive? Covered bonds require that assets are keep on the banks balance sheet where as selling mortgages to FRE/Fan doesn't affect cap ratios.
What is the benefit?
One of the comments in an earlier thread referred to the following summary of what covered bonds may mean:
London Banker Blog: What's up with the covered bond push?
Funny we didnt think this was a good idea before. Probably because it wasn't, and still isn't. Talk about reaching for straws.
I am sure that these bonds will be peddled to pension funds and retiree's with some success as Ben has rendered the treasury bills worthless. Hope springs eternal...
So if you combine mortgage-backed securities, which no investor wants right now, and bonds issued by banks, which no investor wants right now, into one security -- covered bonds -- this helps HOW? Strange.
If a bank issuing covered bonds goes bust, the covered bond holder gets the mortgage loan assets which secure it, leaving the failed bank with all the crappy assets and less value for regulators to give to depositors.
Why do these banks view covered bonds more attractive? Covered bonds require that assets are keep on the banks balance sheet where as selling mortgages to FRE/Fan doesn't affect cap ratios.
Because they don't have a stigmatized name (yet).
They are widely used in europe, Germany and France....
.............
Covered bonds = ta-may-toe / tah-mah-toe; pa-tay-toe / poh - tah -toe.
Doesn't change a thing.
dr writes:
What is the benefit?
I believe that the FED will accept and buy covered bonds.
why was'nt Kona BS first on this thread?
They're throwing everything AND the kitchen sink at this. Smells like they fear what is hiding around the corner.
It's amazing how far ahead LB was on this.
jo6pac
The race to the bottom contiues.
FDIC Covered Bond Statement
FDIC: Press Releases - PR-60-2008 7/15/2008
I really think covered bonds are going to be the only thing left for banks to try to recapitalize. Selling off your performing assets just does not make sense.
I believe that the FED will accept and buy covered bonds.
Ah, so they can be used to print money.
Makes perfect sense.
Since inflating away our problems in 2001-2003 turned into such a disaster, lets instead try inflating away our problems this time around.
Is this going to replace Fannie and Freddie after they default?
OT: geez, playing the markets this summer is like finding a roulette wheel that hits red 70% of the time. Is daytrading always this easy?
Renewed credit turmoil and volatility led the European Covered Bond Council (ECBC) on Wednesday to suspend inter-bank market-making in covered bonds until Monday, Nov. 26. The move is a sign of the stress...
This was mentioned a few weeks ago in the Wall Street Journal as well. The only benefit being that the mortgage is being reported on the balance sheet of the financial institution instead of creating some off balance sheet entity where the mortgages move to back the interest and principal payments. From what I see, there's no real difference between a MBS and a covered bond besides the transparency issue that they seem to be running into with CLOs, MBS and the like. The transparency technically was always there with CLO's provided you take the time to read the 250+ page offering memorandums that come with the issue.
Heard it first on CNBC
" ...you have to buy when things are less worst (rather) than when they get better"
Of course! This man is channeling his inner Cramer...
Mel writes:
Is this going to replace Fannie and Freddie after they default?
No. It's going to complement them.
I really think covered bonds are going to be the only thing left for banks to try to recapitalize. Selling off your performing assets just does not make sense.
For all the horrors of the Great Depression, at least it had an end and all remnants of the filth were largely gone after a decade.
It looks more and more like this episode is going to haunt us for decades to come.
Just like Japan's episode in the 80s still haunts us to this day via the Yen carry trade.
United States: FDIC Policy Statement On Covered Bonds
United States, Finance and Banking, FDIC Policy Statement On Covered Bonds - Mayer Brown - 29/05/2008, Banking Law, Capital Markets, Fund Management - Hedge, Mutual, Investment etc., Loans, Mortgages and Leasing
While covered bonds have a long history in Europe, they are a newcomer to the U.S. capital markets, with only two U.S. issuers to date (Bank of America and Washington Mutual) and an initial issuance in 2006.3 Covered bonds are full-recourse obligations of the issuing IDI, secured by collateral (most often mortgage loans) that remains on the IDI's balance sheet.
he insolvency regime for U.S. IDIs does not permit investors in covered bonds to enjoy all of the benefits available under some European legal systems. However, a structure has been devised that provides some of those benefits. As described by the FDIC:
In the covered bond transactions initiated in the U.S. to date, an IDI sells mortgage bonds, secured by mortgages, to a trust or similar entity (''special purpose vehicle'' or ''SPV''). The pledged mortgages remain on the IDI's balance sheet, securing the IDI's obligation to make payments on the debt, and the SPV sells covered bonds, secured by the mortgage bonds, to investors. In the event of a default by the IDI, the mortgage bond trustee takes possession of the pledged mortgages and continues to make payments to the SPV to service the covered bonds.4
Read on taxpayers...
4 big lenders to start this. B of A and Citi being 2 of them. This is the dream team. LMAO.
Oh yeah, true leaders of sound judgment for sure. B of A who swallowed the pig countrywide (good move) and Citi who is in rubbles right now.
Im with you AC. This is slowly looking more and more like the Japan problem in that we are going to kick this can of valuation down the road for as long as possible. That's the kind of thing that leads to a banking crisis that lasts years, rather than months.
I know what sweat smells like (and some other non-food items as well), but what is the smell of desperation?
If you don't like, what your smellin, get the funk out. Ewwwwww get the funk out!
ac wrote "For all the horrors of the Great Depression, at least it had an end and all remnants of the filth were largely gone after a decade."
I believe Hitler helped our economy more than FDR. W tried war as an economic tool--hasn't worked out too well.
While market participants believe that transactions could be structured to survive these stay periods, doing so would create significant incremental transaction costs. As a result, various parties approached the FDIC asking for advance consent to the exercise of liquidation rights in covered bond transactions. The resulting interim final policy statement provides the requested advance consent, but only for specified actions and only for covered bond transactions that satisfy several requirements.
Specifically, in qualifying transactions, the FDIC has granted its prior consent to covered bond obligees to exercise their contractual rights over collateral no sooner than ten business days after either (a) a monetary default on an issuing IDI's obligation to the covered bond obligee, or (b) the effective date of the FDIC's repudiation of the covered bond obligations, as provided in a written notice by the conservator or receiver. Under the Federal Deposit Insurance Act, contracting parties cannot terminate agreements with an insolvent IDI solely on account of either the insolvency itself or the appointment of the FDIC as receiver or conservator. The policy statement does not alter this limitation or permit contracting parties to exercise remedies triggered solely by insolvency or the appointment of the FDIC as receiver or conservator.
This is a conduit mechanism to transfer defaults to taxpayers!
playing the markets this summer is like finding a roulette wheel that hits red 70% of the time. Is daytrading always this easy?
Yeah I think MS said it right "Wash, rinse repeat"
Thank god for those bailout plans I didn't think the financials would ever go up to short again...
Its so easy I am worried actually... Won't last forever though eventually the market will bottom. Then flat for years and no money will be made long or short... Don't quit your day job...
TAF, SIV, MBS, SWF, GSE.....all of these don't work.
Wait a minute...notice something?
They all have three letters!
I know, Covered Bonds=CB, only two letter.
This is different!
I think we're on to something here.
Let's give it a go!
Covered Bonds are Mefo bills!!
Mefo bills - Wikipedia, the free encyclopedia
Hjalmar Schacht formed the limited liability company Metallurgische Forschungsgesellschaft, m.b.H., or "MEFO" for short. The company's "mefo bills" served as bills of exchange, convertible into Reichsmark upon demand. MEFO had no actual existence or operations and was solely a balance sheet entity. The bills were mainly issued as payment to armaments manufacturers.
Mefo bills were issued to last for six months initially, but with the provision for indefinite three-month extensions. The total amount of mefo bills issued was kept secret.
Essentially, mefo bills enabled the German Reich to run a greater deficit than it would normally have done. By 1939, there were 12 billion Reichsmark of mefo bills, compared to 19 billion of normal government bonds.
This enabled the government to fund rearmament, and do so in a stealthy manner.
The run up in housing prices was fueled by a get rich quick mentality and easy money. Now that buyers understand that prices are going down and not up, all the cheap money by any name is not going to save us. Paulson can keep pitching but no one is catching. This is really getting scary!
Looks like a reasonable way to insure the originator is acting responsibly in making the loan. Basically they stay on the hook for the risk of default, but the same pooling of loans into an MBS occurs so they can replenish capital.
Covered bond reminds be of "regifting"
Funny how the DOJ dropped out of sight in monitoring fraud:
"That contrasts sharply with the punishment meted out by the DoJ to Merrill and CIBC, each of which not only paid $80 million in fines, but also agreed to have their activities monitored by a supervising committee that reports to the DoJ. Even more striking, CIBC agreed to exit not only the structured-finance business but also the plain-vanilla commercial-paper conduit trade for three years. No regulatory agency involved in the settlements would comment on the cases, though the SECs settlement with Citigroup took note of the banks cooperation in the investigation."
Hello, Mr. Paulson...
It's a delaying tactic which has been employed before by other means in other crisis but the point is clear, to allow the institutions that are involved to get back to profit (if they can or merge) whilst buying time.
The die is cast.
Another "benefit" of these covered bonds is that the US government is ultimately on the hook. The banks like BAC are too big to fail, and the banks are directly responsible for the bonds, and the government is now directly responsible for the banks.
energyecon writes:
Is that "are" or "were?"
energyecon | 07.28.08 - 3:03 pm | #
Well that depends on your definition of the word "Is"
Joe, yes that's correct. It forces them to acknowledge that they have to have certain levels of capital to back the bonds in question instead of wiping it off their balance sheets and allows investors the chance to address the issue asap instead of digging thru all those legal entities that they created for the bonds.
I sure hope this plan has the same success as that Super-SIV plan of Paulson's! He sure knows how to fix these financial markets up, but good!
Does anybody know how these covered bonds impact banks cap ratios? Do covered bonds allow the bank to "lever up" more than they would be able to by using deposits to fund the loans?
Covered bond reminds be of "regifting"
I think it's worse than that.
It is (yet again) avoiding the fundamental issue: Every party to a bond or mortgage must have major skin-in-the-game in order to prevent the various types of overselling/fraud that we've witnessed in the past few years.
This doesn't get solved until that factoid returns to the market.
I think it means they are covered in Bullshit, there's a bull market in Bullshit.
I'm somewhat familiar with covered bonds, but I do not see any advantage that could be relevant in the current situation either. You would have to carve them out of the existing balance sheets, leaving the rest with less quality/higher risk.
The crucial aspect is that covered bonds require a sound basis; if the mortgages and assets are crap (think lax underwriting, overpriced real estate), the bonds will be crap too. Just like with securitization.
IMO it is just another attempt to 1. avoid facing reality by trying to turn a turd into gold by giving it another name, like super-SIV etc, or 2. milk the US taxpayer for a bailout in some way, or 3. (most likely) both.
Re: "reports suggest they are - or were - widely used in Europe. (italics added)" Thanks CR!!
New APS 120 applies to securitisation (as defined) and makes express provision for both traditional securitisation and synthetic securitisation.
However, it does not extend to the issuance of covered bonds comprising full recourse debt instruments that are secured by a cover pool (covered bonds). In fact new APS 120 specifically states that covered bonds are not permitted, or considered to be a securitisation (as defined in new APS 120) on the basis that they are inconsistent with the depositor preference provisions set out in the Banking Act 1959 (Cth
IMF Says End of U.S. Housing Slump `Not Visible'
IMF Says End of U.S. Housing Slump `Not Visible' (Update1) - Bloomberg.com
``At the moment, a bottom for the housing market is not visible,'' the IMF said in its Global Financial Stability Report, released today in Washington.
Worldwide asset writedowns and losses have totaled $469 billion in the past year and $345 billion has been raised.
More creative measure will have to be conjured.
London Banker on RGE monitor has an interesting take on covered bond, worth some thought.
Executive summary: apparently covered bonds come before FDIC insured deposits, what if a troubles bank, say WaMu, sold some of them to the usual suspects?
Does that mean that covered bond holders are senior to someone that matters, i.e. other than common share holders?
The Russians have already dumped half of their F&F garbage. I'll see if I can find an English version of the article. It happend preety fast. If the Chinese follow suit that would spell trouble. I don't know if there is any connection between what happend in Russia and "covered bonds", but it doesn't smell right.
Woops, the London Banker URL:
RGE - What's up with the covered bond push?
something makes me think that FDIC cant go over 100K with these either though... if at all
Jimminee...
"Covered bonds allow for extension of credit to a bank SIV or trust that will be serviced by income from hypothecated assets on the bank's balance sheet. The assets stay on the bank's balance sheet unless there is a default on the bonds, at which time the assets are forfeit as collateral to the trust vehicle servicing the covered bond."
..Here we go again.
And to think it was less than a quarter millenia ago (1774) that the phrase "Not Worth a Continental" was first used. How soon we forget.
Soory, that was from: This Prudential Standard is made under section 11AF of the Banking Act 1959 (Banking Act). So the Aussies don't like them..
When structuring a new covered bond programme, itshould be possible to side-step this issue by separatingthe ownership of the asset pool from the issuance of the bonds. Subject to the requirements of the rating agencies, the bonds may then be issued by an existing bank or other financial trader in the originators group.The proceeds of the issue are then used either directly or indirectly to fund the acquisition of the initial pool of mortgages.Unlike in a securitisation, the bond payments are not necessarily funded by repayments under the mortgage pool, nor is the bondholders recourse restricted to the mortgage pool. This should mean that concerns about restricted deductibility of interest pursuant to Section209 of the Income and Corporation Taxes Act 1988 can also be avoided
Obama is having some public (surprise) economic round table and Volcker is right next to him... a chief advisor I guess. Think the bond market might be getting a little spooked by Volcker's presence ? I do.
Tim writes:
Covered bond reminds be of "regifting"
Tim | 07.28.08 - 3:22 pm | #
Re-gifting fruit cake.
ac, we're going to have one heck of a time pulling a Japan-style zombie bank "solution" for numerous reasons, not the least of which the US is a great debtor nation and the USD is the world's reserve currency. How can a USD carry trade develop (or maybe that's what $125 oil is about)?
On the issue of covered bonds, aren't they really talking about propping up the GSE debt with covered bonds to protect the Treasury from possible (inevitable) GSE collapse?
barely - Didn't Obama give Bernanke vote a of confidence ?
Obama gives Fed**Q**s Bernanke vote of confidence
(From Mish's comments)
From the bloomberg article:
"The extra yield on covered bonds sold in Europe by Seattle- based Washington Mutual Inc., the biggest U.S. savings and loan, has jumped 13-fold since the sale two years ago to 3.16 percentage points over government notes."
Wow..3.16 above gov notes...US Banks must have zero credibility. And these rates are going to make mortgages rate cheaper?
Isn't there value in just opening up an alternative source of bank funding?
I think the European CB market is still (sort of) open, and that deals are getting done way tighter than senior unsecured bank debt or AAA RMBS (because of e.g., the double claim on the "cover assets" as well as the issuer's unsecured balance sheet, the overcollateralisation of cover assets to covered bond issuance, and the conservative LTV criteria that apply to the cover assets themselves).
Plus it's a format that European investors are familiar with - at times like this, US banks can only benefit from having as wide an investor base as possible.
Sure, in itself, it's not a "fix" - but I don't see that it can do any harm?
In simple language here, I think these four banks that are in collusion with Paulson, want to create a very small friends of Angelo club, which will be a non-liquid, non-regulated conduit to bounce bad debts around. This revolving substitution with various reference pools will once again bring about non observable assets that will be well beyond Level 3 accounting, i.e, there will no way for these friends to mark-to-market the toxic shit they are dumping back into treasuy -- but they will sell these CDO-like virus bombs to banks, i.e, banks that are in trouble will probably swap debt for bonds and then rating agencies who will be brought on board will rate this carp AA, then, as the banks continue to have trouble, this type of bogus collateral will explode again!
No way this lasts for decades, ac.
This mess is going to collapse: FDIC will be out of commission after WaMu failure and a couple others; Fed will soon be at the limits of its balance sheet; all of Treasury's ideas have been dead on arrival; Federal and state tax collections are plummeting; SWFs are once burned, twice learned now.
I honestly see no basis for sustained intervention; the wherewithal to finance such is just not there.
The next few years are going to be very interesting.
Broker writes:
The Russians have already dumped half of their F&F garbage. I'll see if I can find an English version of the article. It happend preety fast. If the Chinese follow suit that would spell trouble. I don't know if there is any connection between what happend in Russia and "covered bonds", but it doesn't smell right.
Broker | 07.28.08 - 3:33 pm | #
For every seller there is a buyer - so if Russians dumped who scooped it up? And at what prices?
That could part of the story is far more interesting than just the Russians exiting.
IMHO.
Hey, Kona Bullspam, on your 10th mention of the liquidity problems suspending European covered bond trading until Nov 26 do ya think you could get around to mentioning that's Nov 26 2007, was only for 3 business days, and has been over for 9 months?
Wow, the PPT 'finger in the dike' is not holding. Hooray!
Die, MER, die!
If four banks are agreeing to "kickstart" a market for Paulson--what is their quid pro quo? What is Paulson promising them that he's not publicizing or that the MSM has decided it's best not to ask about? Gov't acting as the second/backup guarantor of bonds? Sorta like, "implied" gov't backing?
The Dollar is holding up rather well. Ah well there's always tomorrow.
Covered bond sales were halted in Europe in November of last year!
How are they better now????
Market seems to like this idea. Down 220 (lows of the day)
This is just another way to use The Discount windo as a conduit for a bailout for mis-managed corrupt banking!
World's largest insurer, AIG, getting killed, down 12%. Wow.
Covered bonds are a more honest version of securitization and do not introduce any new problems. For the tinfoil crowd, yes, covered bonds can be used for asset transfers from failing banks but that's no change because if the failing bank wants to collude with GS or whomever to give away assets at low prices they can do exactly the same thing with securitization or plain ol' asset sales. The fact that the markets are frozen up is irrelevant because it requires collusion, remember?
Greenspan: "ARMs are the greatest thing since sliced bread."
And that worked out so well.
Paulson: "Covered Bonds are the greatest thing since sliced bread."
The definition of insanity is doing the same thing over and over and expecting different results.
Bosch: "We can revive the economy by going into large-scale production of neck stretchers."
The DOW is taking it in the pooper.
Did Paulson get his never ending checkbook yet?
I'm surprised we haven't discussed the SEC chairman's goal of extending the new shorting rules.
WSJ: SEC Intensifies Efforts to Rein in Short Selling
Regulators said an extension could be for as short as 60 days and could involve insurance, housing-industry and a broader range of financial stocks, according to these people. SEC Chairman Christopher Cox indicated last week the rules might be extended to all stocks.
Buy something being peddaled by Hanky Panky from a US Bank. HAAAAAAAAAaaaaaaaaaaaaaaaaaa
I smell an Ubernerd post on covered bonds! There goes my weeknight
I think the stress experienced by the CB market in Q4 '07 was more in relation to liquidity in the secondary market - like in most of the credit markets, bid/offer spreads gapped out with the increase in volatility; this was not such a big deal in ABS markets but it was a very big deal in the CB market, which until then had been ultra-boring.
My vague recollection is that the rules around market-making were relaxed - so that banks no longer had to make a market with a certain bid/offer spread (which may have been as tight as 1 or 2 bps).
I'm not sure that it was anything more than a market adjusting its practices to new developments?
dryfly, I don't know the answer, but I expected a big rally today for F&F.(as you can see it is not happening yet) All I am saying is the Russian and the Chinese were holding more than $500 billion of F&F garbage. If the Chinese panic, we might see some serious decline of the market in the not so distant future.
MarkSem writes:
I smell an Ubernerd post on covered bonds! There goes my weeknight
Already done just back in December they were called Super SIVs.
Broker ,
I assume that foriegners are not the only holders of F&F bonds, not even the biggest holders.
The attraction is that the SUPER and SUPER DUPER SIV will buy them.
Uh-oh, where is the Super SIV?
Temporarily Out Of Cannabis
Do make better investment decisions blitzed on non-blitzed? which bear stearns guy liked to smoke up?
Broker | 07.28.08 - 3:33 pm | #
The Russians have already dumped half of their F&F garbage.
Pardon my ignorance, what is F & F.
Getting lost in this flood of acronyms.
Thanks
sbarrkum
Darn you Rob Dawg. You beat me to the punch line by less than a minute.
Freddie and Fannie dood.
Re: Russian reducing exposure to F/F debt.
404 Page not found
DOn't be the last Anglo out of Beijing this summer.
Tanta, Ubernerd covered bonds pleeze.
Covered bond reminds be of "regifting"
LOL.
It's like "regifting" that flaming bag of dog sh*t on your porch to your next door neighbor.
Temporarily Out Of Cannabis | 07.28.08 - 4:02 pm | #
Freddie and Fannie dood
Thanks, TOOC.
Freddie and Fannie Bonds does make sense.
regards
sbarrkum
Mr. Beach, Had not seen that, thanks.
Thank you, anonymous.
That was fun Daddy can we do it again?
This is SIFMA-like financial manipulators that want to create a new product to sell and to use The Treasury, FDI, FASB and all the puppets to align all the stars, just as they did for the CDO markets, i.e, the little matter of Markit:
A private company with privileged relationships with 16 shareholder banks, Markit has unparalleled access to a valuable dataset spanning credit, ...
http://www.markit.com/
This absolute corruption and collusion for The Secretary Of The USA Treasury to be into this madness and using his ex-bankers at Goldman (et al) to pump this SHIT!
Covered bonds would bring to banks the same issues that are going on now in small-and mid-cap public companies with "secured lending."
Hedge funds are loaning these companies money at high rates (12-16%) secured by specific company assets. The loans usually are for terms of 1-3 years and almost always include warrant or convertible kickers.
The problem will be when these loans come due and default, and the borrwers find that a piece of equipment sitting in the middle of the shop floor now belongs to a hedge fund. Small companies are hocking the shop to get access to money.
Covered bonds won't automatially get a low interest rate or a long term. And they could drive up the bank's cost of unsecured credit, because you're inserting secured creditors between them and the bank. It's a pretty desperate move. Shows how bad things are.
Great. Now that bank balance sheets effectively have no value, the banks are willing to back overvalued homes with their own insolvency.
The latest installment of ponzi finance.
News headline for all you naysayers. The Dow managed a late rally to close off the session low (6 points is 6 points!!!)
What a charade! Clearly a demand performance for bank leaders. Wonder if they were handcuffed behind their backs? Wish I could do the cartoon.
If CBs were more profitable, BA, WAMU and other banks would be printing them, but it's not profitable enough, so Pauliano is muscling them to do something they haven't wanted to do on their own, using some yet-to-be-determined money lending scam to be paid for ultimately by guess which taxpayers.
This rush to re-constitute the dying mortgage industry in one week tells me the GSEs' may be deteriorating faster than publicly known.
Is it toxic watching this ongoing corruption?
All the king's short-sale bats,
all the king's (covered) bonds
couldn't get the market's head
out of the pond
Now that bank balance sheets effectively have no value, the banks are willing to back overvalued homes with their own insolvency.
Exactly.
You would buy the bond only if you are stupid enough not to see through the current balance sheets.
America braces itself for a second dip
FT.com / Comment / Analysis - America braces itself for a second dip
Nice graphs : http://media.ft.com/cms/d9b5a07e-5428-11dd-aa78-000077b07658.gif
Long live the Banana Republic.
jin, I agree with you. But $500 -600 billion can do a lot of demage if it is dumped in a hurry.
The operative word is "covered." Anything that has to be covered has a stresspoint somewhere.
Holy Lawyers and Accountants Bonanza, Batman!
Does anyone else detect the odor of implied guarantees?
Paulson: Big Banks to Aid Plan to Finance Mortgages
Banks to Aid Plan to Finance Mortgages: Paulson - CNBC
Paulson said covered bonds were "a promising financing vehicle" and the market could be developed without any federal legislative action being required.
I heard out of the haze Donna Summers was at Obama's round table. What was she singing ?
How do you get transparency with Level 3 non-observable, un-marketable fraudulent securities that are backed by The fed?
YOU dont, but you will get a de-valued dollar!
I think everyone missing the big picture sometime. The purpose of Covered Bonds is to confuse everybody. The worst thing to have in a panic is a direction and momentum. His statement today was to add enough confusion about a possible solution to prevent a slaughter.
Another black day for banks
The news on Friday from National Australia Bank id the only news and anything they can put out to confuse people or have them not understand helps to prevent a meltdown.
It simply doesnt matter.
They are in denial. They are dead, and dont know it yet.
Unless you go back to making loans to people who cant afford it, with the bubble mentality of getting rich overnight by buying a house, the housing market will keep falling until houses are affordable.
2.5-3x annual income is where houses need to be, but mcmansions never were as people bought more house than they needed or could afford. Huge losses will be taken regardless as the market for overpriced, overly nice homes for people that wanted to pretend they had money to throw around has dried up.
Is there ANYTHING besides housing/finance/mortgage our country does or is this it?
WaMu has a covered bond issued, do you trust WaMu and WaMu accounting for Level 3 un-observable BULLSHIT???
friardaddy:
Agriculture and Weapons
barely, it was her version of "We don't need another hero!"
Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate
in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the [public] bank.
You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that
is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.
--president Andrew Jackson, 1832
[Statement to a delegation of bankers who were lobbying for the Bank Renewal Bill of 1832]
The Fed will obviously use WaMu and BAC as The reference model for this, so why worry?
These bonds work fine in the Euro countries that lend to creditworthy people and all loans are full recourse.
No affirmative action there.
If the loans are done strictly on merit and with at least 20% down they work just fine.
It's a pretty desperate move. Shows how bad things are.
rich | 07.28.08 - 4:07 pm | #
Yup. I think that is what 'Mr Market' thought today also... no like covered bonds.
This basically means that they never expect the MBS market to recover.....
Its all downhill from here...
This basically means that they never expect the MBS market to recover.....
If that's true, then it's a step forward.
"If that's true, then it's a step forward."
Now to find somebody to pay that 5 trillion in losses.....hmmmm.....wonder who that would be?
Temasek Continues To Hold 87 Million Merrill Lynch Shares Sources
CNNMoney.com: 404 Page Not Found
In December Merrill Lynch announced that it had issued 91.7 million shares to Temasek at $48 a share to raise $4.4 billion.
I guess that's about a 50% loss. If it continues this way, the SWFs will get really pissed.
Loans backed by specific assets held as collateral? We used to call these facilities "Pawn Shops." Now we can call them "Pwned Shops."
Won't be the Chinese who bail on treasuries.....will be the Saudi's. The Chinese have to much to loose. The Oil producers don't. We will still buy their oil......even if it take Mugabe currency.
This is my guess as to the goal of this endeavor:
Is my understanding correct?
Yup. I think that is what 'Mr Market' thought today also... no like covered bonds.
Also not that despite that pummeling the 10 year stayed above 4%.
A far cry from near 3.3% when we were seeing these kind of sell offs back in March.
UPDATE 1-US corp distress could mean big bankruptcies-report
UPDATE 1-US corp distress could mean big bankruptcies-report
| Reuters
The distressed trading levels in both investment-grade and speculative-rated bonds "suggests that we will see record-sized bankruptcies by volume into 2009-2010," said Christopher Garman, writing in high-yield research publication Leverage World.
Including both high-grade and high-yield issues, about 7.5 percent of total corporate bonds are trading at distressed levels, pointing to nearly $97 billion of defaults through 2009, Garman said.
That level of distress is the same seen during the credit downturn of 2000 to 2002, a period when the largest corporate bankruptcies on record were filed.
About 23.5 percent of the U.S. junk bonds S&P tracks were distressed in July, up from 13.7 percent in June, the agency said in a report on Friday.
Rob Dawg writes:
Loans backed by specific assets held as collateral? We used to call these facilities "Pawn Shops." Now we can call them "Pwned Shops."
Awesome.
Hahaha!
How does FDIC recapitalize?
My understanding is, it's an inter-bank insurance corporation. It can't just run back to Congress for additional funding.
All Fall Down writes:
News headline for all you naysayers. The Dow managed a late rally to close off the session low (6 points is 6 points!!!)
All Fall Down | 07.28.08 - 4:10 pm |
LOL! You're so right. Now CNBC, Bloomberg, etc. can happily announce that while the market got creamed, it did manage to close off the lows of the day! Go Bulls! The start of the next leg of the great bull market!
frydaddy groused: "Is there ANYTHING besides housing/finance/mortgage our country does or is this it?"
We flip burgers, too.
Hi, there - welcome to WalMart!
I'm sure those count for something.
Zack: So if too many banks fail at once and the FDIC runs out of money, it turns to the banks that are failing?
Is this right? Holy Moses.
"It can't just run back to Congress for additional funding."
Wanna make a bet on that one
friardaddy
How does FDIC recapitalize?
They'll charge more to member banks to provide insurance.
FDIC is the only Acronym that they should be bailing out.....
"Soylent Green "
Prophetic film.
Following up to my own post -- if a bank is allowed to sell the value of an asset -- while simultaneously keeping it on the balance sheet -- does this mean that banks can use covered bonds to get around their statutory capital requirements?
Look, the Chinese announced today that they'll keep buying Agencies regardless so that they can keep their currency down...so let's do indeed shove these lemon mortgages into Agencies. The Chinese don't care...
"The Chinese don't care..."
No they now its a faster trip to anarchy if you have a Billion people and half of them will be starving in a couple of weeks.....
Forgive me for being dense, but what precisely is the Treasury's role here?
"Forgive me for being dense, but what precisely is the Treasury's role here?"
Cheerleader
Nemo writes:
Forgive me for being dense, but what precisely is the Treasury's role here?
Printer of last resort.
"How does FDIC recapitalize?
My understanding is, it's an inter-bank insurance corporation. It can't just run back to Congress for additional funding."
The FDIC is a division of the Federal Reserve, so why would it have to go to Congress? Congress can't print money. The Fed can.
BB writes:
"IMF Says End of U.S. Housing Slump `Not Visible' "
Foreclosures rising faster than bank REO sales, causing increasing bank unsold inventories now over 10 months at June sales rates, are very visible on my daily tabulations, and the ending of the summer buying season won't help.
Nemo, would you buy anything from those four banks without Uncle Sam standing by or behind them?
Forgive me for being dense, but what precisely is the Treasury's role here?
They're going to issue the flood of treasury debt that allows the Federal Reserve to monetize these things to implement their latest reflation scheme.
Wait a minute...
China is overcrowded and holds too many US dollars.
The US is broke and has too many houses.
The Chinese cook the best food in the world but don't have enough to eat.
The US overeats as it pays farmers not to grow crops.
There simply must be a solution in there somewhere.
Ni Hao!
"There simply must be a solution in there somewhere. "
Yes we let them starve and rent houses....
Broker | 07.28.08 - 3:33 pm | #
The Russians have already dumped half of their F&F garbage.
I guess this was the article.
Thanks again TOOC.
Russia cuts exposure to Freddie, Fannie-c.bank
Russia held about $100 billion in U.S. agencies Freddie, Fannie and Federal Home Loan Banks at the start of 2008, as part of its now near-$600 billion reserves, although over 80 percent of the holdings were due to mature within the year. "It's now less than $50 billion," central bank first deputy chairman Alexei Ulyukayev said.
"The Russians have already dumped half of their F&F garbage. "
I bet they hated they got paid in Dollars.....probably would have taken pesos
Temporarily Out Of Cannabis :
Are you proposing the chinese buy obese US to cook and eat them whilst compensating with the too many US dollars they hold?
Hmmm..
Paulson in today's press conference:
"As we're all aware, the availability of affordable financing is essential to turning the corner on the current housing correction. So we've been looking broadly for ways to increase the the availability and lower the cost of mortgage financing to accelerate the return of normal home buying and refinancing activity."
What is Paulson's definition of "normal home buying and refinancing activity"?
Later he mentions that this isn't a "silver bullet", but is a great example of innovation in the market. That's what we need, more innovation.
Our previous crack supplier dead, we need a new one.
"As we're all aware, the availability of affordable financing is essential to turning the corner on the current housing correction."
And here I thought the key to increased demand was lower prices.
I am sooo far behind the times.
As we're all aware, the availability of affordable financing is essential to turning the corner on the current housing correction
No, letting prices DROP is essential to turning the corner on the current housing correction.
Something no one in leadership seems to have the stomach for.
Instead they devise ways to try to oppose the laws of gravity.
I'd say that's hopeless. But go ahead and knock yourself out.
You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that
is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.
See, bankers are smarter nowadays. They give the politicians a cut.
They need a kick alright drag all these banking bastards and Hanky Panky out in the sreet and kick thier ass.
We will be set up to cash your covered bonds for merchandise in a few days, along with social security checks and welfare checks. There will be a $2.50 charge/hundred.
From Londonbanker.com:
"Covered bonds will be used to render profitable assets off soon-to-be-bankrupt corporates, leaving pensioners and other creditors with the stripped carcass in the liquidation."
Couldn't something like this happen to Countrywide leaving bond holders with a bankrupt shell with no assets ?
From the Bloomberg coverage:
The bonds have been used on a limited scale in the U.S. since 2006, after introductory offerings by Seattle-based Washington Mutual Inc. and Bank of America of Charlotte, North Carolina.
Well then, that settles it. Sign me up!
No, wait, scratch that. As a taxpayer, I guess I'm already signed up.
People sure love to pump those q-balls. I guess a lot of peoples lives depend on that.
Matt, Re: Paulson and silver bullets.
Silver bullets are the mythical method of choice in killing undead, blood sucking monsters. Is the secretary suggesting we're in need of such a tool?
Interesting metaphor.
Actually, I think Paulson was referring to Coors Light. He is a man of the people.
More the same old stuff (crap) .
Slightly OT, but did the Australian National Bank complete write down of US CDS exposure last week have anything to do with the market drop today?
Paulson in today's press conference:
"As we're all aware, the availability of affordable financing is essential to turning the corner on the current housing correction. So we've been looking broadly for ways to increase the the availability and lower the cost of mortgage financing to accelerate the return of normal home buying and refinancing activity."
I get the feeling that these guys don't know what to do.
Nemo, I think I saw you signature in 5 different places.LOL
"Forgive me for being dense, but what precisely is the Treasury's role here"
That's a good question. I think nothing. The role of the Fed will be outsourced to BlackRock. BlackRock will take care of everything from here. Fancy name.
The duds say it all - and it's depressing.
Taking a cue from the grim economy, this fall's fashions at Banana Republic, Gap and H&M are featuring a distinctly Depression-era trend of cloche hats, pencil skirts, conductor caps and baggy, vintage-style dresses.
Al Thompson, 40, a senior employee at a recruiting company, hates the look - it covers far too much for his taste. He also predicts it won't last.
"Everything in fashion and economics is cyclical," he said. "This fashion has returned just as we're hitting a point in our economy much like what we faced in the '30s."
"Everything goes away and comes back."
A TOUCH OF CRASH - NYPOST.com
Damn right it does, I'm kind of partial to Banana Republic myself.
Brown bag lunches stealing business-from-fast-food
Brown-bag lunches stealing business from fast-food - Fast Food Maven : The Orange County Register
Bunch of damn thieves.
The term "silver bullet" was used multiple of times by Paulson and another representative. I'd be more specific, but I don't want to watch it again.
I thought the same thing about the undead. By using the term "silver bullet" they admitting that they are dealing with something that is undead. Kind of funny, but not.
Or the better explanation as Temporarily Out Of Cannabis puts it, they are looking for some more Coors Light. That would go along with Bush's statement the other day that Wall Street "got drunk" and is hungover.
Anon 5:21: The Depression era clothes were rad, dude. I have been hoping for years that we would all start wearing those sweet hats that dudes wore back then. Even poor people looked prestigious.
Gentlemen, I think you are missing the point here with Covered Bonds. Yes, they stay on the bank's balance sheet UNTIL they default. Then they are delivered to the trust and come off the bank's balance sheet. Can you spell 'no recourse' loan, deliver the mortgagues, debt paid! Never goes down, never marked down, just delivered- worst case. A perfect solution--for the bank. Better you loan an individual the bucks on a deal you personally know is OK.
Shh... IB, don't tell Kona; he/she is on a roll.
UB, sorry.
I am a German and in Germany covered bonds are known as "Pfandbriefe". They have been around for decades and are favorites for institutional investors because of their safety and yield (slightly above German government bonds - known as "bunds").
Why are they so safe ? There are at least two reasons:
a) In Germany it is illegal for a bank to make a loan - incl a mortgage - without requiring the borrower to lay bare his financial condition, i.e. salary, employment, assets, tas return, etc. It is laid down in a law (KWG, para 18).
b) A covered bond that rests on mortgages can only use a mortage up to 60% of the market value of the collaterized property.
Banks rarely provide mortgage that are higher than 60% (they could but they don't). Usually, the borrow makes a 25% down payment (or even 30%). This is the key reason why German homeownership at 40-45% is much lower than in the US despite a constant savings rate of 8-12%.
Many Germans who rent could buy but do not (and instead invest in stocks and bonds and allow capital formation in the real economy instead of wasting money oversize houses which in economic terms in overconsumption).
And many Germans who want to buy a house can not because they do not have that 25% down payment.
It is therefore very important to emphasize the 60% cap on mortgage against market value.
Underwriting rules by law and the 60% are paramount. Otherwise this will end as badly as MBS mortgage backed securities.
Debtors have also access to the issuing banks balance sheet. There is a reason why US banks have not followed this well-regulated trust inspiring route from Germany.
It would mean serious lending standards and a serious effort to actually be responsible for the mortgage and carry risk and hence it would herald a return to developed country lending standards.
Curiously, the market was down 1% before the Paulson speech today and then down another 1% during and after his speech. It was the first time so far that I Paulson speech did not assure / calm / inspire the market. This is a good sign.
Adult analysis is now replacing disneyland thinking. Lending standards are stil slow to return: When banks demand only 5% downpayment in a market where house prices are sinking 15% year-over-year you know that this fiesta is not over.
The increase in renters in the US is an involuntarily but beneficial boost to savings and capital formation. So there is bright side if one is prepared to see it.
ac writes,
"Because they don't have a stigmatized name (yet)."
Too true. I call this the Rambler syndrome, although it goes back to Nash and maybe even further. A company turns a product into crap, and instead of improving the product hangs a new name on it. Thus, Rambler got a reputation for making crap and became American Motors which got a well deserved reputation for making crap and so it was morphed into segments of Chrysler, etc. etc...
MEr doing another $8B offering. This is an enormous offering. Temesek to take down $3.4B of it.
ML to dilute shareholders by $8.5bn
hoocoodanowed?
"Taking a cue from the grim economy, this fall's fashions at Banana Republic, Gap and H&M are featuring a distinctly Depression-era trend of cloche hats, pencil skirts, conductor caps and baggy, vintage-style dresses."
We've got a shop in town called New Deal Clothing that carries nothing but such stuff.
I figure, why the heck not? It's a college town, with young people alreadywearing retro gear that harkens back to every decade back through the forties swing and zoot styles. What's ten more years, to fashion?
Nice work Kottan. I was just rereading the paulson piece...just strikes me as so much desperation and nothing else.
The facts :
this type of security is already poo with investors in Europe where the market is established.
It's tiny here, so yes, it WILL show huge growth rates if anything changes. BAC etc will be sure to tout that as a savior. Remember your growth from small starting values fun with numbers.
The types of loans that could be bundled are going to be of the quality that FNM and FRE would already be doing. And if they arent somehow capable of doing it, what exactly is this saying about those two gems? Says they are junk and basically broken and can't function.
So now, other crippled banks are going to take more bad loans? I doubt it. The underwriting standards, as Kottan points out, still make more losses in a market like this. They wont be able to stave off price declines because there is a growing pile of REO that is going to force the same lenders to push down prices while it tries to revive the market, this settign off another leg in the banking crisis.
This is just so stupid - no wonder the market didnt buy into it today.
InvestmentBanker --
Can you spell 'no recourse' loan, deliver the mortgagues, debt paid! Never goes down, never marked down, just delivered- worst case.
Bzzt, wrong, thanks for playing. Again from the Bloomberg coverage, or any coverage if you bother to read it:
Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay.
I still wonder what Treasury's role here is supposed to be. The article says they are issuing "best practices guidelines". As if our largest banks do not already know how to make, you know, loans...
OK I guess I see how one might question that based on the past five years. Still, if Treasury is involved, then these new instruments presumably create some new mechanism to deliver my tax dollars to these banks. What is it, exactly?
There must be an easy way to transform a covered bond into a Level 3 asset
Mish's Global Economic Trend Analysis: You Know The Banking System Is Unsound When....
Kottan,
Thanks for the info on German covered bonds. Apparently, Paulson thinks adding leverage will improve the time tested German method.
If it ain't broke, don't fix it. Or better yet, don't break it.
Kottan: Thank you for the perspective. Why do you think that Germany and other european countries stayed so conservative while we pushed enough "candy" on ourselves to make us sick? Do you think that the long term interests of your government are more in line with those of your citizens than ours, for instance?
I can't help remembering that securitization of mortages was invented in Germany, and that a ground rule for using this invention was also a very conservative loan to value ratio.
Please explain this:
"Banks rarely provide mortgage that are higher than 60% (they could but they don't). Usually, the borrow makes a 25% down payment (or even 30%)."
Where's the other 10%-15%?
Did anyone figure out if WaMu is making a killing in the covered bonds they have?
CountryWide voted the Worst Company in America and wins The Lucky Golden Shit award
Countrywide Home Loans Wins Consumerist's Worst Company In America Contest - The Consumerist
I'm watching MER on the Nasdaq After-hours site here:
Merrill After Hours
Since bad news is good news -- for the moment, it appears that MER is trading above its close by a hair.
Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. threw their support behind Treasury Secretary Henry Paulson's effort to spur covered bonds as a new source of mortgage financing.
``We look forward to being leading issuers as the U.S. covered bond market develops,'' the banks said in a joint statement in Washington. They applauded Paulson's release today of guidelines for issuers of covered bonds, which detail the types of loans that should go into the securities and how their payments ought to be made.
The banks stopped short of announcing specific plans for issuing the bonds, illustrating how the market may be slow to take off in the U.S. in the aftermath of the mortgage meltdown. Even in Europe, where covered bonds are a market in excess of $3 trillion, investors are shunning the debt amid a collapse in appetite for investments in housing.
``Mortgage-backed securities investors are not in the mood right now to buy bonds with anything less than government backing,'' Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in an interview, referring to debt guaranteed by Fannie Mae and Freddie Mac.
`Paves the Way'
Bank of America Treasurer Jeffrey Brown said in a separate statement that ``today's announcement paves the way to substantial growth in the U.S. market.''
Federal Reserve Governor Kevin Warsh backed Paulson's plan to support covered bonds, highlighting that the central bank would accept them as collateral at the discount window for direct loans to commercial banks.
The bonds have been used on a limited scale in the U.S. since 2006, after introductory offerings by Seattle-based Washington Mutual Inc. and Bank of America of Charlotte, North Carolina.
Kottan- "So there is bright side if one is prepared to see it."
So, Kottan, maybe we're not at Peak Beer?
"the central bank would accept them as collateral at the discount window for direct loans to commercial banks"
Sweet, now we know what they are doing. In other news there will not be any vasoline provided to the taxpayer first.
Kottan would have us believe that you couldn't put a BMW emblem on a Pontiac and make it a respectable car.
"Kottan would have us believe that you couldn't put a BMW emblem on a Pontiac and make it a respectable car."
That's because Kottan lives in a reality-based world.
Nemo:Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay.
spip....
Please remember, the banks are the Servicing Agent. They can make up any shortfalls UNTIL it ceases to be profitable, then they call DEFAULT, DELIVER the mortgagues and are gone. Please, be my guest and buy some of these. Or, you could just read the prospectus and find out what they really are. Not to be snide (OK, I am) after about 40 years in the Banking business, I probably have forgotten more about covered bonds than Bloomberg reporters will learn in the next 40 years. But, please, buy some. Buy a lot. They are like gold. Can't loose! And of course, your 'trust' company will always be true to you and not the bank that chartered them, guaranteed! Never fails. Put you retirement in them. Guaranteed!
Kottan, come back, we have so many questions!
This might be mentioned somewhere, but I couldnt' tell from the article(s) if they were talking about issuing the new bonds based on new pools of new mortgage originations, or if this is meant to repackage all of the existing junk? Sorry Kona if you answered this, but I just couldn't keep up.
If Paulson is for it, I'm against it. I don't care what it is - oxygen, blow-jobs - anything that POS endorses is bad.
Uncle Billy, it has to be for new originations. They can't repackage existing junk--not anymore, even in our phantasy-based world.
I'm going long bobn's call at 6:08
OT
MER to write down CDO holdings by $5.7B and sell $8.5B in shares.
Merrill Has $5.7 Billion of Writedowns, Sells Shares (Update2) - Bloomberg.com
This just in from Florida Teacher Pension Fund:
Hey ya'll, are these covered bonds as safe as the CDO's we bought from Lehman last year?
Shanondoah: One would hope. But if so, I wonder how large an enterprise that will be in the next few years considering hardly anyone who wants to buy a house has any cash. 25%? 30%? 40%? More like -2%.
Uncle Bill, I suspect we won't be following the Germans with their silly 40%-rule.
bobn, as much as I detest Paulson, I have to admit I couldn't not be against those things that you mentioned.
These covered bonds will be triple A rated by Moody's, S&P and Fitch and insured by Ambac and MBIA, so relax, these are safer than CDOs and they have been around for over three centuries, relax, trust us, drink more vodka!
Re: The rise of the Pfandbriefe market, particularly after the passage of legislation in 1900 codifying their usage, encouraged the creation of generally state-owned bodies specializing in this financial product. The Pfandbriefe segment became particularly important in the early decades of the 20th century. The rapid rise of industrialized production techniques had in turn created a surge in the urban population, stimulating a need for new and affordable housing for the growing working class. The economic and political upheavals of the post-World War I era made the Pfandbriefe and their relative safety particularly attractive.
Did the nazis use these?
Kona, you and me... WE are going to start our own ratings company. Let's call it just "Moody" or "Standardly Poor"
We can create a bomb proof bunker with thick glass ceiling -- no one will be able to get in to influence our ratings, but we'll be transparent enough to inspire confidence. There should be a little tip jar connected to one of those long vaccuum tubes so people can show us their appreciation if we're doing a good job. No tips over $500,000 so that everyone understands there's no quid pro quo.
Speaking of nazis, can yah take covered bonds to The Discount window as collateral -- I mean, could yah in thepst, like does Wamu or BAC (trick question)?
Uncle Billy, I'm in, where do we start this?
Maybe CR has extra space at his place, but WYF about Tanta?
Does Europe allow such easy access to a Fed-like window, in regard to the junk bonds, I mean covered bonds they spin off; does this mean we will have a Level 4 thing with FASB, i.e, like totally unobservable and totally unaccounted for...
I give this a 5 star shit rating:
US covered bonds structure: The first of the US covered bonds came from Washington Mutual (WAMU) , the largest S&L in North America. WAMU is itself a prominent issuer in securitization market: the fact that it thought of entering the covered bonds market is quite significant in itself. The US structure does not use either true sale or guarantee from any special purpose entity. In fact, the transaction is based on a simple pledge of assets to a bond trustee. S&Ps rating report for the WAMU transaction says: In U.S. structured finance transactions, an FDIC insured bank may grant a perfected security interest in collateral, and the security interest, subject to certain conditions, will be enforceable against the bank and its receiver or conservator notwithstanding the insolvency of the bank
Well, first we need credibility, so we have to keep posting on CR, as well as on other high profile blogs.
CR won't want us. We have too many conspiracy theories. I recommend we use some covered bonds to purchase an old missile silo.
Then all we need are some 3rd party celebrity endorsements, and we're off!
No. No freaking way. That link you have to Julien Dore... where did you get it?
Uncle Billy: Germany tends to use the 'Merchant Banking' model which says "never, never loan more than 60% of the value of Anything". (same model we use) This model tends to make covered bonds OK, if the 'trust' company turns the mortgagues over to the holders IMMEDIATELY. This allows you (as a holder) the ability to forclose, take the property and immediately resell or rent it. If the whole process is left in the hands of the 'trust' company, well, the whole process is a guess! Some trust companies are great, some suck. The rule of thumb we use is-- trust yourself, first, last and only. Who knows, americans tend to be really lazy and stupid (INHO) and will probably get screwed on this mess, although the ideal is sound.
saluid
Uncle Billy vs. Mt Pelerin (hello von Hayek fan):
you asked : Where's the other 10%-15%?
(When 60% is the mortgage cap LTV for covered bonds and 25% is the down payment). The source for the remaining 10-15% often come from a so-called "Bausparkasse" ("construction loan bank") which offers a multi-year savings plan with low interest rates against the promise for a second lien mortgage with low interest rates.
I do not want to overly bash America but I am just shaking my head about the extent of the capital depletion and misallocation of America's wealth. It is not only residential real estate. When you read the reports about CRE commerical real estate and the overreliance of regional and local banks then you can come to the conclusion that big banks lend money through cash--out refinance and HELOCS to borrowers who send sleepwalk to the next mall to do "recreational shopping" (James Howard Kunstler). This can not be a sustainable way for a country for this great potential.
I recommend all who are interested to familiarize yourself with James Kunstler (http://www.kunstler.com) and his two boooks "Geography of Nowhere" and "The Long Emergency" where Kunstler describes the shortfalls of suburbia as a unique and wrong living arrangement and in his second book the world when oil production has peaked and the havoc it will create on a country - the US - where half of its population lives in suburbia.
I earnestly believe, too, that the US has entered a phase of transition with high gas that will force it to enter other living arrangements that a huge portion of its housing stock will be worthless because it will be abandoned.
Look at this country ! It had sane thoughtful small and regional banks and for long periods (1947 to 1975 and 1991 to 2003) rather stable lending conditions and "normal" bubbles (exceeding inflation path by 20-25%, normal breathing, not dramatic).
Why the year 1947: As Kunstler pointed out, this is the year after the movie "It is a wonderful life" with James Stewart was released. Most Americans watch it as a simple touching upliftung movie - which it is. But in retrospect it is also a very programmatic movie since it depicts the urban center of Stewart's hometown as full of vices and the green grasses of the suburban houses to be built for god-loving families as the place of virtue. Again, the release date was 1946. This coincided with the conviction of Americans to abandon their cities - and their neighbors.
Matters were not helped by the government after the first (1973) and particularly after the second (1979) oil shock when Nixon and then Reagan decided to cut loose the manufacturing sector and bet on services and then (since the 1980s) also on the financial sector - tellingly called "industry" in a vain attempt to simulate core activity.
In Germany, Switzerland and Japan the manufacturing sector is still 30% of GDP after all these years and yet Germany consumes 2.5m barrel a day with 80m people against 21m in the US with 300m people and manufacturing sector that is 12% (!) of the GDP - and financial sector that is 24% (twice as high !). In Germany, the financial sector is at less than 10%. How is master in your economy - and who should it be ?
Historically, such distortions are sad signs of a late concluding chapter of a phony boom. Germany had had phony booms, too: 1918-1923 and 1933-1939. Both periods ended in hyperinflation (1923 and 1948).
Kevin Philipps has written that the closest analogy to the hyperfinancialization of the US economy can be found in 16th century Spain - which lived off a phony gold and siver boom after 1500 - become the darling borrower of German, Italian and Dutch merchant banks, lived in luxury without a real sector and collapsed shortly after 1600. Spain was so thoroughly depleted that even two hundred years later it missed entirely out the Industrial Revolution.
I truly like America - too many non-liars and true savers have purchased houses in the previous years only to be sunk by liar neighbors and complicit banks - smart regulation is a public good.
Perhaps it is no accident that public goods and social fabric and notions of governments providing useful services (e.g., regulation) declined in robust correlation with the suburban build-out and its corrosive effect on social cohesion.
An economy can not be run on "financialization". Americans will rebuild their country with savings, more labor-intensive work (farming will see a renaissance) as will small and mid-size communities. It will be a (much) lower living standard - apparent by 2012. But the joy of life in communitiy, proximity and cohesion will more than compensate.
America needs to bid farewell to high homeownership - 70% is too high; even 60% is too high. It was 50% until 1945 and tellingly America had better infrastructure and a higher share of a manufacturing sector than today.
Less "services", less financials, more real sector, more farming.
Be prepared.
I understood that part, IB. Just didn't get the part where Kottan says the bonds are based on mortgages with ltv no more than 60%, but on the other hand says that downpayments are in the 25-30% range. I'm looking for the extra 10%-15%. Where did it go?
That was given to me as a gift by someone that thought this was Ms Bair from FDIC, thus I had no way of knowing anything about this or that, so, it was just serendipity, and I'm still really freaked out by it...
As for the rating agency, we can negotiate, but maybe a name like UB Kona, or UBK @ CR
These are mild hints, and I must further offer apologies, as I have been highly distracted today and have not had any time to go over any of this, and my posts on cover bonds have been highly lacking in detail, thus, in a few hours or so, I'm "all in" and will dig much deeper!
Many thanks also to CR for amending the opening mention to the europe comment, which is obviously part of the current marketing campaign of mis-information, i.e, to suggest this a great security vehicle that has been making german beer safe for over three centuries -- not so, don't fall for that!
Ok... found the extra percentages
Thanks Kottan, will read and digest.
Kona, will dwell on the naming of our new entity. We might even name it after Sheila's lovechild...
Bank of America sold $2 billion of five-year covered bonds in June last year that were rated AAA by Moody's Investors Service, Standard & Poor's and Fitch Ratings. The debt was priced to yield 49 basis points more than Treasuries, less than the spread of 70 basis points that the bank's $500 million of senior unsecured bonds due 2012 were trading at. The spread on the covered bonds quadrupled to 201 basis points as of yesterday, according to Barclays Plc. A basis point is equivalent to 0.01 percentage point.
Sales of covered bonds dropped to 17.8 billion euros ($28.3 billion) in June, the least in six months, as investors demanded the highest rewards on record to hold the debt, according to data compiled by Bloomberg. The average yield climbed to 83 basis points over similar-maturity government rates, from 26 basis points a year ago, according to Merrill Lynch & Co.'s index of covered bonds outside of Germany's market, where the securities are known as pfandbriefe.
Covered-bond prices have fallen 2.5 percent this year, according to Merrill index data.
Prussian Farmers
The bonds date back to the 1770s, when they were used in Prussia to finance agriculture, according to the European Covered Bond Fact Book. Trading in the market for the securities was shut down for a week in November to ``avoid undue over-acceleration in the widening of spreads,'' according to the Brussels-based European Covered Bond Council, which represents banks and borrowers.
Ahhhh, the good ol days:
Can 2007 match 2006, a vintage year for covered bonds? With the technique spreading around Europe and, of course, the US, expectations at the beginning of the year were high that 2007 would be the biggest yet. Lonely WaMu
The US, which contributed Eu4bn to the late rush of supply from new entrants in 2006, is another unknown quantity that has already undershot early forecasts. Washington Mutual had said that it would probably access the market on a quarterly basis, but disposed of $18bn of mortgages and sold $5bn of mortgage backed securities at the end of the fourth quarter, reducing its funding needs for the last quarter of 2006 and the first quarter of this year.
WaMu expects to return to euros in the second quarter and could be joined by Bank of American and Wachovia around that time, with Countrywide potentially entering the market later in the year. However, new programmes are always subject to a certain degree of uncertainty and few analysts are forecasting US volumes for 2007 with a high degree of confidence. (see US issuers chapter on page xx for more detail on their plans.)
Swedish issuers hit the ground running when they entered the market in October, but after a brisk start to the year when all three tapped the market, they are unlikely to continue at such a pace. Their plans suggest that only one further issue is likely from each this year, although the cost of the basis swap from euros to Swedish kronor will be a key determinant of supply, and only Länsförsäkringar is expected to join in the near term. (See chapter on page xx for more on Swedish issuers.)
Three of the covered bond markets smallest jurisdictions could double in issuance volumes in 2007: Austria, Finland and Portugal. In Finland, OKO Bank is considered a likely candidate to join Sampo in using covered bonds.
With Bawag still absent from the covered bond market following its troubles and change of ownership, Kommunalkredit Austria has been the only jumbo issuer from Austria since June 2005. However, the Austrian Landeshypothekenbanken are losing their state support in April and have made clear their desire to use covered bonds as a funding instrument in future in a similar manner to Germany's Landesbanks after the loss of their state guarantees.
WTF? He called me a what?
(shaking head in disappointment)
New shitty search engine: Cuil
Financial Stability OvERviEW
National Bank of Belgium
http://www.nbb.be/doc/ts/Publications/FSR/FSR2008EN.pdf
The global covered bond market which was estimated to amount to 1600 billion euro at the end of 2007 is concentrated in Germany (Pfandbriefe) with 47.1 p.c. of covered assets, France (obligations foncières) accounting
for 12.8 p.c., UK (contractual covered bonds) for 12.3 p.c. and Spain (cédulas hipotecarias) for 10.8 p.c. The resilience of this market to the current market shocks has been uneven and dependent on jurisdictions, with a
temporary suspension of market-making by the European Covered Bond Council in November 2007. While the German market has resisted well, the UK market suffered, with some banks being temporarily unable to raise funds.
Part of the explanation could be that covered bonds in Germany, France or Spain are issued under special legislation, while in other countries such legislation is lacking and the double investor protection is only provided
by contractual arrangement. But even when such legislation is in place, markets may discriminate between jurisdictions. So, in Spain, the spreads between mortgage notes and Spanish government bonds widened during 2007, while in Germany the corresponding spread between Pfandbriefe and German government bonds remained stable.
Of course, covered bonds can only partially fill the role of ABS. For a start, assets remain on banks balance sheets.
Moreover, covered bonds generally pay fixed rates and have bullet maturities which may reduce their attractiveness in countries with substantial mortgage prepayments (like in the UK, Ireland and the Netherlands).
An important caveat is that the largest part of interbank transactions is contracted for a much shorter duration than 3 months, so that these rates are not necessarily representative of rates that banks actually have to pay to get liquidity. Indeed, according to the ECB Euro Money
Market Survey, about two thirds of the transactions in the unsecured interbank market are overnight while almost the whole remaining portion has a maturity of maximum
1 month.
Money, money, money. I love money!
Uncle Billy Vs. Mt. Pelerin
No insult intended.
best regards
Can we name these "Bair Bonds"?
Kottan: What do you do for a living?
WOW, these bitches could use a shitload of covered bonds!!
Merrill Lynch & Co., in a broad move to clean up its troubled balance sheet, said Monday it will sell a big slice of its asset-backed securities and issue new stock to raise $8.5 billion of fresh capital.
Economist. Work in Washington. Which is also the number 4 housing bubble market in the US. Few others here know that. Most do not.
How about you ? Any direct exposure to a bubble area in the US as well ?
Any proximity to good arable land ?
Kottan: Land, no. I wish. I would have a steep learning curve though even if I did. I worked for a few years on someone else's farm for a few years, but if left to my own devices, or my wife's, we would probably go hungry. My ancestors proved that we have a genetic problem in regards to farming.
Yes, I live in a bubble. Big bubble.
Bair bonds, somewhat related to Brady bonds!! I like it!
Economist in Washington who has an interest in population distribution and agriculture. You ever hear of a guy named Ortalo-Magne?
No. Big deals requiring large amounts of structured debt have taken a big hit," says Francois Ortalo-Magne, an associate professor of real estate
The curve made a lazy push steeper with the 2-10-yr yield spread heading out at 143.5. The dollar picked up a bit of bid post-Paulson press conference but trade is fading the move at the close
Kottan, would you be interested in a job as Treasury Secretary? FED Chairman? SEC Chairman?
Stolen from the internet, some web page, I just clicked and got this:
Essentially, covered bonds would shift the residential credit risk away from Fannie Mae and Freddie Mac, and toward the structure of the covered bond (assuming some form of credit enhancement like over-collateralization)and the bond buyer.
Firstly, banks issuing the covered bonds have to keep the loans on balance sheet. The biggest problem right now for banks is maintaining their capital to balance sheet ratios. Issuing covered bonds is fine for funding, but bad for capital.
Secondly, U.S. banks want what their European counterparts have; specific legislation defining what a covered bond is and how it will be treated by regulatory authorities. Right now we don't have that.
Thirdly, and most importantly is, I just can't imagine that the secondary market liquidity for covered mortgage bonds can get within a mile of the liquidity of Fannie Mae and Freddie Mac mortgage backed securities.
Agency backed MBS trade in the secondary market with a bid/ask spread of 1/32nd of 1% in volatile time like now. In normal times they trade with a bid/ask spread of 1/64th of 1%. They are arguably the most liquid bonds in the world. They have their own clearing corporation (nearly an exchange) and have very well defined good delivery standards, which allow them to trade TBA. They also have a very liquid funding market known as the dollar roll market. And even with their own clearing corporation and the well defined TBA market, trading and settling agency backed MBS is a incredible labor and capital intensive operation. Can you imagine if instead of Freddies and Fannies, dealers would have to trade and settle the covered bonds of 100 different banks? Never going to happen, at least without those securities trading points behind Fannies and Freddies.
And there is the rub. If covered bonds trade way behind Agency MBS (meaning if Agency MBS trades 100-00 then covered bond trades 98-00) , then that's terrible execution for the bank trying to sell his loan production into the secondary market. That means the bank is going to pass that bad execution on to the borrower. So if right now a bank would set a rate to a borrower for a 30-year fixed-rate loan at 6.75% to get paid par (100-00) in the secondary market as a Fannie Mae security, he would have to charge the borrower 7.50% or more if he put the loan into a covered bond. That's a HUGE cost to the prospective borrower.
I'd like to thank everyone for coming to the Covered Bond tent and reading some of the literature and looking at a few of this mornings hand outs. Kona will be back from the bathroom in about an hour and then the evening performance will begin, with free vodka and snacks...
Damn flies.
It looks like Bair figures covered bonds put the FDIC directly at risk.
"FDIC May Stall Paulson Mortgage Plan", by Liz Moyer, Forbes, July 28, 2008.
Re: Entstehungsgeschichte [Bearbeiten]
1974 schrieb Helmut Zenker die erste Kriminalgeschichte um den Wiener Polizeimajor Adolf Kottan. Als Hörspiel wurde diese Geschichte gemeinsam vom ORF-Landesstudio Niederösterreich und dem SWF produziert[1] und im Frühjahr 1976 gesendet. Im selben Jahr wurde vom ORF auch ein Fernsehspiel produziert (Hartlgasse 16a), das allerdings Kontroversen über die Art der Darstellung der Polizeiarbeit hervorrief, vor allem seitens der Polizeigewerkschaft.
Yah!
Ok, if we get a little farm going, I would really like to the one who intereprets the
Rindfleischetikettierungsüberwachungsaufgabenübertragungsgesetz
The following is an excerpt from a 10-K SEC Filing, filed by WASHINGTON MUTUAL, INC on 2/29/2008
http://sec.edgar-online.com/2008/02/29/0001047469-08-002083/Section24.asp
At December 31, 2007, loans totaling $84.83 billion, $10.49 billion,
$9.09 billion and $8.59 billion were pledged to secure advances from FHLBs,
preferred securities issued by an indirect subsidiary of the Company, borrowings
issued under its covered bond program and other borrowings.
At December 31, 2006, loans totaling $58.95 billion, $7.28 billion,
$6.25 billion and $2.62 billion were pledged to secure advances from FHLBs,
preferred securities issued by an indirect subsidiary of the Company, borrowings
issued under its covered bond program and other borrowings.
In September 2006, WMB launched a $20 billion covered bond program intended
to diversify its investor base, lengthen the maturity profile of its liabilities
and provide an additional source of stable funding. Under the program, the
Company may, from time to time, issue floating rate US dollar-denominated
mortgage bonds secured principally by its portfolio of residential mortgage
loans to a statutory trust not affiliated with the Company, which in turn will
issue Euro-denominated covered bonds secured by the mortgage bonds. At
December 31, 2007, $7.74 billion of covered bonds were outstanding. Under
current program covenants, due to recent downgrades by Moody's and Standard &
Poor's, the WM Covered Bond Program may not issue additional covered bond
series.
Includes $7.74 billion and $5.05 billion of covered bonds that were
outstanding at December 31, 2007 and 2006.
As of June 2006 FHLB loans to WaMu were $55 billion, 16% of its assets. Lessening its dependence on FHLB is a continuing aim at the bank. Because finance provided via FHLB is typically less than three years, banks that use the system are building in an asset and liability mismatch because mortgages are long-dated.
Government-sponsored enterprises are an important source of liquidity to mortgage markets by making loans against mortgage portfolios. But in recent years there have been a lot of negative headlines about Fannie and Freddie; against that backdrop it makes a lot of sense for banks to diversify their sources of funding. The problem banks had was that it was virtually impossible to match FHLB rates.
http://www.euromoney.com/Article/1070694/Category/127/ChannelPage/8959/Covered-bonds-Details-emerge-of-WaMus-landmark-covered-bond.html
Il Dormiglione.
Bhahahaahha
Miles: "Don't you see? Political solutions never work! That's what I've been trying to tell you! In six months, we'll be stealing Erno's nose!"
Re (OT): Sub-inspector Krishna Murari of Parsudih police station confirmed the arrests of two smugglers. He also confirmed that around 250 cows were freed from the clutches of the accused today.
Murari, the officer in charge of Parsudih police station, however, expressed his displeasure over the modus operandi of the GRS members. Members often take law in their hands and intercept the smugglers on their own, instead of informing us. The GRS act as law, he said. The officer said despite arrests, a number of cattle smugglers go scot-free after receiving bail.
fyi.
http://www.treas.gov/press/releases/reports/USCoveredBondBestPractices.pdf
Donna Summer was singing She Works Hard For The Money!
YouTube
- Donna Summer - She Works Hard For The Money
Hey is it just me or does it bug you when The Department of the Treasury refers to itself simply as "Treasury"?
I mean, shouldn't it at least be "The Treasury"?
It feels awkward, like my friend's mom is forcing me to call her by her first name.
"Covered" is also a quaint euphemism for "inseminated". How appropriate.
Woah. A lot of misinformation on this thread.
First, covered bonds are pure funding tools. There is no capital benefit whatsoever. The point of encouraging them is to clean up banks' balance sheets or funding ratios, but to give them an alternative, funding source that is cheaper than securitisation or unsecured bonds.
Second, from an investor's perspective your first recourse is to the bank, and then to the assets. By definition, covered bonds are at least as creditworthy as the banks issuing them. If every single mortgage originated by the bank defaults, then covered bondholders still have as much chance of being repaid as any other bondholder of the bank.
Third, wherever covered bonds have been legislated, there have been strict limits on how much issuance banks can do, in order to avoid damaging depositors. Typically it's 4% to 10% of total liabilities.
Fourth, the interesting question is what the eligibility critieria will be in any US legislation. There's little point in duplicating Fannie/Freddie criteria, since that funding will almost inevitably be cheaper. But the criteria in other countries are broadly similar (absent FICO scores), for example maximum LTVs of 80%. The trick will be to shape the eligibility criteria in such a way as to a) provide a decent amount of eligible assets, b) ensure their quality to attract/reassure investors (and a AAA rating), c) avoid duplication of the GSEs funding capacity.
Ginger,
That was very informative.
Thank you,
Oops, I made a few typos. The first paragraph should read: "The point of encouraging them is NOT to clean up banks' balance sheets or CAPITAL ratios, but to give them an alternative funding source..."
Just to reiterate what others have said.
The difference between the European and the American approach seems to be that in the US there will be no legal definition of a Covered Bond. The regulators will know it when they see it.
If a bank sells one of these and the bank fails then the taxpayer, via the FDIC, is on the hook. But since there is no legal authority to externally guarantee that the contents of the bond really are safe enough to deserve to be covered they might look no different than current debt acquired and put into bonds.
Rather than change the rules that led to so many bad loans, the Paulson apparently just wants to change who gets hit when the bonds backing a Wall Street bank are at risk.
It seems reasonable to assume that by the time Paulson, Bernanke, Bair and Cox are done all possible risks to Wall Street and their investors will be covered by the taxpayer.
- NY Times
snip
The F.D.I.C., which takes over failed banks, promised to respect the terms of the bonds, so that bondholders would be repaid from the value of the mortgages, even if other bondholders in the failed bank suffered major losses.
Covered bond markets exist in many European countries. In some of them, laws make the legal standing of such bonds clear, but Mr. Paulson and the other agencies concluded that no legislation was needed, and that policy statements by regulators would suffice.
It is expected that Bank of America will be the first issuer. Bank of America has issued such bonds in Europe, and did one $2 billion American offering of covered bonds in June 2007, before antipathy to mortgage securities intensified.
snip
Antipathy to mortgage securities or mortgage securities from specific banks?