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: An Investing Stalwart Through the Centuries
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...
State Budget Crises Threaten U.S. Economic Recovery
Across the country state budget crises are threatening to undermine the U.S. economic recovery.
Some 48 states are emerging from a round of painful budget cuts for their 2010 fiscal budgets, and at least 46 states face shortfalls for the upcoming 2011 fiscal year, which in most states began July 1.
The recession has caused the steepest decline in state tax receipts on record - and states will continue to struggle to find the revenue needed to support critical public services for a number of years as a result.
Since virtually all states are required to balance their operating budgets each year they cannot maintain services during an economic downturn by running a deficit, as the federal government does.
Some 48 states are emerging from a round of painful budget cuts for their 2010 fiscal budgets, and at least 46 states face shortfalls for the upcoming 2011 fiscal year, which in most states began July 1.
The recession has caused the steepest decline in state tax receipts on record - and states will continue to struggle to find the revenue needed to support critical public services for a number of years as a result.
Since virtually all states are required to balance their operating budgets each year they cannot maintain services during an economic downturn by running a deficit, as the federal government does.
Inflating Government Bubble Can Only Lead to a Major Financial Hangover
During the 1990s, the inflationary policy of the U.S. Federal Reserve fueled a tech-stock bubble. When that bubble burst, the Fed inflated a larger one in real estate. Now that the real estate bubble has burst, the Fed is inflating the biggest bubble of them all – a bubble in government. While the earlier booms provided at […]
Having Served its Purpose, TALF Could Soon Turn a Profit for the Fed
The Term Asset Backed Securities Loan Facility (TALF) program has succeeded in reviving the consumer loan-backed market and may even return a profit for the Federal Reserve, according to William Dudley, one of the main architects of the facility.
In an interview with Dow Jones Newswires, Dudley, the president and chief executive officer of the Federal Reserve Bank of New York, said that the TALF program has reignited the market for securities backed by loans on vehicles and credit-card debt.
TALF was launched by the Fed to entice buyers to buy new bonds backed by auto and student loans. At the time, investors were reluctant to purchase securities backed by shaky collateral, fearing they would lose their entire investment.
In an interview with Dow Jones Newswires, Dudley, the president and chief executive officer of the Federal Reserve Bank of New York, said that the TALF program has reignited the market for securities backed by loans on vehicles and credit-card debt.
TALF was launched by the Fed to entice buyers to buy new bonds backed by auto and student loans. At the time, investors were reluctant to purchase securities backed by shaky collateral, fearing they would lose their entire investment.