I know we are all occupied with our views on Paulson’s rescue plan. So for a change how about a discussion on COVERED BONDS? Bailout or no bail out, governement intervention or maket failure possibility, from what I hear there are 2 fundamental things that emerge from the mortgage crisis: a) Lenders ought to take a pice of the credit risk on what they lend (responsibility lending) b) Mortgage pools underlying the securities need to be Dynamic rather than static (above a threshold defaulted mortgage to be replaced by another mortgage to keep up the value) European ‘Covered Bonds’ do the both. Treasury is already making plans to introduce this new product in the market. See detailed presentation at: (http://www.aei.org/docLib/20080919_KashkariPresentation.pdf) Will be interesting to see what you all think about government fostering innovative products in the market and Covered Bonds in particular!
Someone has to take the loss when a mortgage defaults. We do that now with tranches. It sounds like covered bonds are just a new way of dividing the same pie… or giving the pie customer the piece they want. I used to follow a mreit that originated mortgages. It retained the lowest tranches (i.e. retaining credit risk on mortgages it originated). Of course, it’s bk now.