Thoughts about Henry Paulson's "covered bonds"... what are your thoughts?

Question

Short term and long-term implications?

Contingencies for success?

Could this ensure a degree of safety that counters the unfettered (and catastrophe-prone) growth model in mortgages that was previously fueled by extensive leveraging--and the accompanying growth of credit?

I'd really appreciate your input

Answer 1

I think every time Paulsen speaks the market sells off.

Answer 2

Covered bonds give the bond holders a part of the bank's balance sheet as collateral.  Which means that these bond holders would get paid before ordinary depositors if the bank becomes insolvent.  And for this reason FDIC prohibits US banks from using covered bonds for more than 4% of their funding.

http://www.ft.com/cms/s/0/056c8604-5ce1-...

At least in the short term, covered bonds are not going to have much of an impact because of that 4% rule.  FDIC can change this rule later on.  But this would increase the risk that FDIC wouldn't have enough money to cover insured depositors at FDIC insured banks.  And such relaxing of rules may backfire by scaring ordinary depositors and causing runs on various banks.