The Senate Banking Committee held a hearing Wednesday to further examine the uses and regulatory issues associated with covered bonds, to decide if they are a viable alternative to stimulate the U.S. economy and contribute to sustained growth.
Money Morning Contributing Editor Shah Gilani explained the benefits of a U.S. covered bond market in a story Wednesday. Covered bonds are debt securities backed by the cash flows from public-sector loans or from real-estate mortgages. They resemble other asset-backed securities (ABS) created through the process known as "securitization," but have one big difference: Covered-bond assets must remain on the issuer's consolidated balance sheet.
"A robust covered bond market offers many solutions to the problems that currently ail the U.S. economy, as well as its underlying financial system," said Gilani. "A covered bond market would jump-start needed lending by creating a healthy, transparent and "honest" securitization market. It would also enable the United States to regain its title as the financing center for the global economy."
Covered Bonds
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Senate Hearing on Covered Bonds Highlights Wall Street's Resistance to Transparency
Covered Bonds: An Investing Stalwart Through the Centuries
So-called "covered bonds" are debt securities that are backed by the cash flows from public-sector loans or from real-estate mortgages. Covered bonds resemble other asset-backed securities (ABS) created through the process known as "securitization." But there's one big difference: Covered-bond assets must remain on the issuer's consolidated balance sheet.
Created in Prussia in 1769 by Frederick the Great, covered bonds have a long history and through the centuries have become a very popular investment instrument in Europe. There, known as Pfandbriefs, these mostly AAA-rated debentures make up the third-largest segment of the German bond market (behind public-sector bonds and unsecured bank debt).
"In the past few years, covered bonds have enjoyed a resurgence as investors search for high quality investments with attractive yields and as European banks look to finance the growth in mortgage lending," fixed-income heavyweight PIMCO wrote in a 2006 research note to investors.
Created in Prussia in 1769 by Frederick the Great, covered bonds have a long history and through the centuries have become a very popular investment instrument in Europe. There, known as Pfandbriefs, these mostly AAA-rated debentures make up the third-largest segment of the German bond market (behind public-sector bonds and unsecured bank debt).
"In the past few years, covered bonds have enjoyed a resurgence as investors search for high quality investments with attractive yields and as European banks look to finance the growth in mortgage lending," fixed-income heavyweight PIMCO wrote in a 2006 research note to investors.
Covered Bonds: The Solution to America's Economic Ills
When it comes to the global financial crisis and the Great Recession that followed, this could well be the ultimate irony: The Wall Street invention that got us into this mess may well be the only thing that can get us out.
I'm talking about securitization, a masterstroke of financial engineering in which assets are aggregated in order to reduce risk. Once heralded as the greatest financial innovation of modern times, abusive securitization practices instead generated a feeding frenzy of gross excesses that exponentially multiplied risk and drove the world to the brink of financial Armageddon.
Now, a hybrid form of securitization called "covered bonds" may be our only way out.
Here's why....
I'm talking about securitization, a masterstroke of financial engineering in which assets are aggregated in order to reduce risk. Once heralded as the greatest financial innovation of modern times, abusive securitization practices instead generated a feeding frenzy of gross excesses that exponentially multiplied risk and drove the world to the brink of financial Armageddon.
Now, a hybrid form of securitization called "covered bonds" may be our only way out.
Here's why....
To understand the saving-grace features of covered bonds, please read on...