Treasury Secretary Henry Paulson's Bond Bailout Plan
Monday, July 28, 2008JEFF YASTINE: With foreclosures increasing and no end in sight to the credit crunch in the mortgage market, the Bush administration is looking for solutions. Treasury Secretary Henry Paulson unveiled the latest idea today, covered bonds. Stephanie Dhue looks at what they are and why regulators want to create a market for them.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Henry Paulson gathered support from bank regulators and the nation's four largest banks to help kick start the U.S. market for covered bonds.
HENRY PAULSON, TREASURY SECRETARY: I believe covered bonds have the potential to increase mortgage financing, improve underwriting standards and strengthen U.S. financial institutions by providing a new funding source that will diversity their overall portfolio.
DHUE: Covered bonds are similar to mortgage-backed securities, but instead of selling the package of loans outright, the banks keep the underlying loan risk on their balance sheet. If the underlying loans default, they must be replaced with other assets. Because the banks retain the credit risk, they have an incentive to make sure the underlying loans can be repaid. Covered bonds are a $3 trillion market in Europe, but are nearly nonexistent in the U.S., in part, because the laws governing them here have been unclear. Today the FDIC and the Treasury introduced a standard of best practices for their sale. Jeff Brown of Bank of America called it a significant step forward.
JEFF BROWN, CORPORATE TREASURER, BANK OF AMERICA: These statements help the legal, regulatory and market framework necessary for the development of a robust U.S. covered bond market.
DHUE: But banking analyst Bert Ely says the FDIC needs to go further before investors will embrace covered bonds.
BERT ELY, BANKING ANALYST, ELY & CO.: It has still not provided the absolute assurance that the covered bond market needs and that investors in covered bonds need to know that no matter what happens to the bank, they will get paid.
DHUE: Analysts doubt there will be enough demand for covered bonds to help the mortgage market. Treasury Secretary Paulson acknowledged that may the case.
PAULSON: I don't think there's anything we can put forward as the potential answer, but that certainty would be no excuse for not looking for alternative steps that can be taken that can make a difference.
DHUE: A banking executive says covered bonds could become a significant portion of the $11 trillion U.S. mortgage market, but analysts don't expect that to happen until after the housing market recovers. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
