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Credit Crisis

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The Stage Has Been Set For Another Credit Crisis

If you think yesterday's market action was something to worry about, you ain't seen nothing yet.

President Barack Obama getting re-elected sets the stage for another credit crisis.

When the president came into office in 2008 he had a mandate to fix the banking system, which consisted of too-big-to-fail banks holding America and its economy hostage to their greedy schemes.

He swept that mandate under the door of Congress and the Federal Reserve.

The president has no position on the big banks, and it seems he likes it that way.

By lightening up on his already watered-down rhetoric about making banks toe the line, he got campaign money from them. So did Congressmen. That money came from the Federal Reserve.

Now that the president has won a second term, he's not about to fight Congress over their pandering to the big banks, since he's got other things to fight with them over; rather, he's going to advocate a lite-touch going forward to allow banks to continue to strengthen their balance sheets so they can fuel an American recovery.

It seems to be all happening under the cover of darkness. And, it's not going to work.

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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.

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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....

To understand the saving-grace features of covered bonds, please read on...

Is There an Ulterior Motive for Bailing Out Greece?

Since back in December, when Fitch Ratings Inc. slashed its credit rating on Greece's debt to below investment grade for the first time in 10 years, there's been a mind-numbing flood of media coverage of that European country's debt crisis.

And yet, despite high-volume of high-level media coverage, none of the stories have picked up on a very basic - yet very key - fact...

The bailout being developed is as much for Germany as it is for Greece.

Let me explain ...

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Money Morning Mailbag: How the Demise of Glass-Steagall Helped Spawn the Credit Crisis

Question: Please address why the removal of the Glass-Steagall Act in 1999 caused the financial meltdown of 2007 and why its reinstatement is the only way to stop the financially risky behavior allowed after it's removal. Address why we will very likely have another meltdown (probably in 2010) unless reinstated.

Answer: Mr. Scott: While the overturning of what remained of Glass-Steagall did not cause the meltdown, it certainly contributed mightily to the systemic nature of the crisis.

Allowing commercial banks and investment banks to marry created giant operations that became too big to fail and too profitable to break up. Everyone was making money. The overriding problem was not the integration of commercial (deposit-taking and loan-making) banks with investment (capital-markets trading) banks, but the extraordinary migration of all banks into the same products, trading, and risk-taking businesses. I am definitely including the ubiquitous game of mortgage origination, securitization, sales and trading.

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U.S. Economy Forecast: What You Need to Know in 2010

2009 was a wild year for the economy. The stock market soared, but the U.S. economy was hampered by rising unemployment and tight credit markets. What will 2010 bring? Find out the four major trends to watch for in the next 12 months... and where to look for real gains.

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The High Cost of Greed …

Money Morning subscriber Ted Kubichek wrote and asked if one of our experts could comment on the underlying cause of the financial crisis whose fallout will affect the U.S. economy for years. Here's an edited version of that question, as well as the reply by Money Morning's Shah Gilani, an internationally recognized expert on the global credit crisis.

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The Credit Rating Firms Are Running Scared – It's About Time

When it comes to the U.S. credit crisis, we’ve all heard the numbers. The stock market decline wiped out $7 trillion in shareholder wealth. It forced the federal government to commit to $11.6 trillion in bailout programs and stimulus spending. And it’s led to the longest U.S. downturn since the Great Depression. Everyone also knows […]

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Credit Crisis Expert Shah Gilani Details Financial Crisis Investment Strategies on Free Video

Money Morning Staff Reports Is Citigroup Inc. (C) worth a look as a low-priced stock? Why are U.S. Treasury bonds right now not the safe haven most investors believe them to be? What's the next sector that's destined to crash? Investors who want the answers to these and other questions, and who want to understand […]

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Credit Crisis Safety Plays: Three Steps to Take to Make Sure Your Bank is Safe

[The second installment in an ongoing series detailing strategies that investors can use to insulate themselves and their finances from the ongoing credit crisis.] By Keith Fitz-GeraldInvestment DirectorMoney Morning/The Money Map Report Seeing banks such as Wachovia Corp. (WB) get sold or Washington Mutual Inc. (WM) fail is scary for retail banking customers. But there […]

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After Reloading With Wachovia's Banking Business, Citigroup Takes a New Aim at the U.S. Banking Market

By Jason Simpkins Associate Editor Citigroup Inc. (C) will acquire Wachovia Corp.’s  (WB) banking operations for $2.l6 billion, a deal that will restore Citi’s title as the biggest U.S. bank by assets while transforming the once-highly regarded Wachovia into an investment-management operation. In becoming the latest big U.S. bank to bolster its assets by rummaging […]

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Although Congress Squelches the "Paulson Plan" it's Still $700 Billion to You and Me

By Keith Fitz-GeraldInvestment DirectorMoney Morning/The Money Map Report Did U.S. taxpayers dodge a bailout bullet? Maybe not completely. To be sure, under the $700 billion credit-crisis bailout plan proposed by U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., there were some decidedly scary codicils. For one thing, there was a near complete lack of taxpayer […]

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