The July 29, '08 AR Dem/Gazette reported that B of A, City, Morgan, etc were getting behind Sec. Paulson's recommendation of "covered bonds" as a means of recapitalizing banks with toxic balance sheets. A covered bond is a bond for which the bank must hold AAA assets as colateral. About the same time the FDIC announced expedited procedures for the release of the assets covering the bond to the bond originator in case of default. There are lists of over 100 banks in danger of default in circulation. Consider the following scenario. B of A approaches a bank on the default list with an offer of a "covered bond" to provide additional capital against which the bank can lend. The bank rounds up all of its AAA assets, performing mortgages, etc. and uses them to "cover" the bond. The bank gets the proceeds of the bond. It is not enough to keep the bank from failing. It fails due to toxic paper still on its books. B. of A gets all the AAA assets as surity for its bond. FDIC gets all of the toxic paper. Repeat a few times and the FDIC will be coming to the taxpayers for its own bailout. The "covered bond" originators make out like bandits. The taxpayer gets shafted. How is this not government sponsored looting of the financial system? By the folks who brought us the response to Katrina. The potential for abuse is obvious and massive. The only real solution to the "sub-prime" and CDO mess is to write down the losses and clean up the mess. Don't let a few "covered bond" originators get away with everything of real value. It is bad enough already. Don't say you were not given a heads up. DON'T LET THIS HAPPEN! Thank you,
Consider the following scenario. B of A approaches a bank on the default list with an offer of a "covered bond" to provide additional capital against which the bank can lend. The bank rounds up all of its AAA assets, performing mortgages, etc. and uses them to "cover" the bond. The bank gets the proceeds of the bond. It is not enough to keep the bank from failing. It fails due to toxic paper still on its books. B. of A gets all the AAA assets as surity for its bond. FDIC gets all of the toxic paper.
Repeat a few times and the FDIC will be coming to the taxpayers for its own bailout. The "covered bond" originators make out like bandits. The taxpayer gets shafted. How is this not government sponsored looting of the financial system? By the folks who brought us the response to Katrina.
The potential for abuse is obvious and massive. The only real solution to the "sub-prime" and CDO mess is to write down the losses and clean up the mess. Don't let a few "covered bond" originators get away with everything of real value. It is bad enough already. Don't say you were not given a heads up. DON'T LET THIS HAPPEN!
Thank you,
Consider the following scenario. Bank X approaches a bank on the default list with an offer of a "covered bond" to provide additional capital against which the bank can lend. The bank rounds up all of its AAA assets, performing mortgages, etc. and uses them to "cover" the bond. The bank gets the proceeds of the bond. The Bank in trouble will still fail because of all the toxic waste it still has. Bank X gets all the AAA assets as collateral for its bond. FDIC gets all of the toxic waste. Repeat a few times and the FDIC will be coming to the taxpayers for its own bailout. Result? The "covered bond" originators make out like bandits: the taxpayer gets shafted. Privatised profits: socialised losses. No solution based on debt can work: the Capital to support the amount of credit necessary is not available. We need a solution based on a new take on investment. ie "Equity" - but not as we know it, Jim" through new forms of generic Real Estate Investment Trusts ("REIT'S")
Bank X approaches a bank on the default list with an offer of a "covered bond" to provide additional capital against which the bank can lend. The bank rounds up all of its AAA assets, performing mortgages, etc. and uses them to "cover" the bond. The bank gets the proceeds of the bond.
The Bank in trouble will still fail because of all the toxic waste it still has. Bank X gets all the AAA assets as collateral for its bond. FDIC gets all of the toxic waste.
Repeat a few times and the FDIC will be coming to the taxpayers for its own bailout.
Result?
The "covered bond" originators make out like bandits: the taxpayer gets shafted.
Privatised profits: socialised losses.
No solution based on debt can work: the Capital to support the amount of credit necessary is not available.
We need a solution based on a new take on investment. ie "Equity" - but not as we know it, Jim" through new forms of generic Real Estate Investment Trusts ("REIT'S")
There is no possible solution based upon debt.
We need instead to reinvent Equity on a fairly cosmic scale, but the money is there to do it. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
