Sunday, August 3, 2008

Covered bonds, the next taxpayer bailout

Although too long and probably not suitable for including in a post, you are all encouraged to read "Covered Bonds, Exposed Taxpayers" in the current issue of Business Week. As sure as bears use Charmin in the woods, this will come back to bite us in the future.

In short, banks issue mortgage back bonds to finance real estate loan purchases. The loans remain on the banks' balance sheets, thus, if the bank fails, the loans are repaid to the investors ahead of payments to the FDIC. If there are insufficient assets to repay the FDIC, the FDIC takes another financial hit. Enough financial hits to the FDIC, and we are back to the taxpayer paid S&L bailout of 1990. FDIC Sheila Bair, who is a very bright lady and understands these risks, has limited banks exposure to 4%, but Treasury Secretary Paulson and the banks want higher limits for "increased liquidity." If we have learned nothing else in the past three years, "increased liquidity" is nothing more than code words for indiscriminate loans to increase short-term corporate profits, to heck with what happens to those loans in the future.



G Spot1 said...

Increased liquidity: Come on, Uncle Sammy! I need this money to pay off the bookies or they're gonna bust my kneecaps! This is a sure thing. Can't lose. I double my money, pay the bookies back, pay you back, what could go wrong? It's a sure thing."

(Well, replace "bust my kneecaps" with "give me a golden parachute" and you pretty much have the same thing)

Paul said...

"... the next taxpayer bailout" is probably a mischaracterization. I suspect there will be several more taxpayer paid bailouts before the covered bonds come back to haunt us.