On Monday, Treasury Secretary Henry Paulson laid out guidelines for banks seeking to issue so-called covered bonds as a way to finance home mortgages. Four big
By issuing covered bonds, a bank borrows money from investors, using assets on its balance sheet – such as home mortgage loans – as collateral. The efforts of the big banks would "kick-start" the market’s development, he added.
Together, the firms hold or guarantee some $5 trillion of mortgages and mortgage securities.
For investors, one potentially appealing aspect of covered bonds lies in their structure. Because the bonds are backed by a specific pool of mortgages or other loans, investors in the bonds issued by a failed bank wouldn’t find themselves in line with other general creditors. For banks, covered bonds could offer a new way to raise funds for mortgage finance, now that the securitization model is faltering.
Moreover, Monday’s moves didn’t change the fundamentals of the