Dismissing a push for covered bonds

Bob Moon Sep 29, 2008
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Dismissing a push for covered bonds

Bob Moon Sep 29, 2008
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TEXT OF STORY

Renita Jablonski: The credit market’s in such bad shape now, there’s even trouble for investments once considered solid — including a type of lending that’s thrived for hundreds of years. Here’s our senior business correspondent Bob Moon:


Bob Moon: They’ve been around since the hits were being turned out by Mozart. In 1763, Frederick the Great introduced a concept known today as the Covered Bond. The bank issuing the bond keeps the original mortgage on its own balance sheet. So — music to the ears of investors — if that underlying loan goes bad, the bank is on the hook to the bondholder — and presumably, that leads to more responsible lending.

They’re mainly a European invention, but there’s a push to use the idea here as one way to stimulate the mortgage market. Now, though, even the European covered bond market is having its worst month in almost a decade.

Still, banking industry consultant Bert Ely says that’s no reason to dismiss the concept:

Bert Ely: They’re undergoing a stress test now and, you know, assuming they survive the stress, which I think they will, that actually will build longer-term investor confidence in them.

For now, though, confidence in the credit market has sunk so low, investors are shunning even a concept that’s been proven over more than two centuries.

I’m Bob Moon for Marketplace.

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