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    WaMu Shows Paulson Mortgage Rescue Plan Is Perilous

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    WaMu Shows Paulson Mortgage Rescue Plan Is Perilous

    Post by sang_garuda on Fri Jul 25, 2008 10:24 am

    Treasury Secretary Henry Paulson's plan to revive U.S. mortgage financing depends on investors buying the same kind of bonds they're shunning in Europe.

    Paulson wants to create a version of Europe's market for covered bonds in the U.S. just as sales of the debt have fallen to a six-month low and prices have dropped 2.5 percent this year. While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.

    The extra yield on covered bonds sold in Europe by Seattle- based Washington Mutual Inc., the biggest U.S. savings and loan, has jumped 13-fold since the sale two years ago to 3.16 percentage points over government notes. The premium for debt of Bank of America Corp., the largest home lender, has quadrupled since June 2007.

    ``This is absolutely not going to be an instant fix for the U.S. mortgage market if you see how tough it is and how expensive covered-bond funding currently is for established markets in Europe,'' said Florian Hillenbrand, an analyst who follows the securities in Munich for UniCredit SpA, Italy's largest bank.

    Paulson says the $3.3 trillion covered-bond market, which dates back to 18th-century Prussia, is a remedy for the worst housing crash since the Great Depression. It offers ``new sources of mortgage funding'' that will cut costs for homebuyers, he said at a forum in Washington on July 8.

    Reviving Lending

    Developing a U.S. market for the securities is the latest of Paulson's initiatives to revive lending among banks crippled by $452 billion of credit losses and writedowns. His plan for a ``SuperSIV'' to bail out the $400 billion market for structured investment vehicles failed last year after Wall Street firms rescued the credit funds independently. Both Democratic and Republican senators are looking for changes in the Treasury secretary's proposal this month to shore up home lending by allowing the government to buy stakes in Fannie Mae and Freddie Mac.

    Paulson introduced the idea of U.S. covered bonds in March, and the Federal Deposit Insurance Corp. issued final rules for the market last week. Collateral for the securities must be prime residential mortgages that include fully documented borrower incomes, the regulator said. It limited the amount of the debt banks can sell to 4 percent of overall liabilities.

    No Subprime

    Banks would not be able to use subprime or so-called Alt-A mortgages lacking full documentation as collateral, according to the regulations.

    Covered bonds achieve higher ratings than regular notes by augmenting the issuer's pledge to pay with a group of assets such as mortgages that can be sold in a default. The extra security allows lenders to pay less interest.

    Bank of America sold $2 billion of five-year covered bonds in June last year that were rated AAA by Moody's Investors Service, Standard & Poor's and Fitch Ratings. The debt was priced to yield 49 basis points more than Treasuries, less than the spread of 70 basis points that the bank's $500 million of senior unsecured bonds due 2012 were trading at. The spread on the covered bonds quadrupled to 201 basis points as of yesterday, according to Barclays Plc. A basis point is equivalent to 0.01 percentage point.

    Sales of covered bonds dropped to 17.8 billion euros ($28.3 billion) in June, the least in six months, as investors demanded the highest rewards on record to hold the debt, according to data compiled by Bloomberg. The average yield climbed to 83 basis points over similar-maturity government rates, from 26 basis points a year ago, according to Merrill Lynch & Co.'s index of covered bonds outside of Germany's market, where the securities are known as pfandbriefe.

    Covered-bond prices have fallen 2.5 percent this year, according to Merrill index data.

    Prussian Farmers

    The bonds date back to the 1770s, when they were used in Prussia to finance agriculture, according to the European Covered Bond Fact Book. Trading in the market for the securities was shut down for a week in November to ``avoid undue over-acceleration in the widening of spreads,'' according to the Brussels-based European Covered Bond Council, which represents banks and borrowers.

    Yield spreads on covered bonds due in May 2009 from Bradford & Bingley Plc, the U.K.'s worst-performing banking stock in the past year, have soared to 315 basis points from 23.5 basis points when they were issued in May 2004, according to Royal Bank of Scotland Group Plc prices on Bloomberg.

    The Bingley, England-based bank fell 80 percent this year in London Stock Exchange trading amid rising U.K. mortgage delinquencies, and the ratings on its subordinated debt have slipped to two levels from the bottom of the investment-grade scale. Even so, ratings on its covered bonds remain AAA.

    `Not Much Appetite'

    ``There's not much appetite for any paper carrying the name Bradford & Bingley, even if it is a AAA rated covered-bond issue,'' said Georg Grodzki, head of credit research at insurer Legal & General Group Plc in London. ``The market has decided to ignore credit ratings in vast sections of the credit universe.''

    Bradford & Bingley's external spokesman Matthew Newton in London declined to comment.

    S&P assigns AAA ratings to all but two of more than 100 covered-bond programs it assesses. The New York-based company said it analyzes the cash flow generated by assets backing the securities to make sure that bondholders have ``timely access'' to funds in the event of insolvency.

    ``At the moment, we are comfortable with the ratings that we've assigned,'' said Karen Naylor, head of European covered bonds and European residential mortgage-backed securities at S&P in London.

    WaMu Downgraded

    Moody's downgraded 6 billion euros of covered bonds from Washington Mutual, the only U.S. issuer of the securities besides Bank of America, to Aa1 from Aaa in March and four more steps to A2 in May after saying the notes were vulnerable to a decline in the quality of residential mortgages. Holders of WaMu's covered bonds due 2011 are demanding yields typical of bonds two grades above high risk, or junk, according to a Merrill Lynch index of BBB rated companies.

    While S&P and Fitch kept their AAA ratings, Moody's ``gave it a very draconian downgrade,'' said Tim Skeet, head of covered bonds at Merrill Lynch in London. ``The downgrading suggests that it is somehow on a par with some of the toxic waste that has actually caused the dislocation of the markets, which is a long way from the truth.''

    Issuer's Strength

    The rating company says it looks at the strength of the issuer when grading covered bonds, as well as the underlying collateral.

    ``Moody's does not assume any covered bond would have a Aaa probability of receiving timely payments following the default of the supporting bank,'' said Nicholas Lindstrom, head of European covered bonds in London for the New York-based firm.

    Covered-bond yields remain lower than the rates on conventional debt. The spread on WaMu's 2011 bonds is less than a third of the 1,131 basis points on its $400 million of 5 percent unsecured corporate bonds due 2012, according to prices on Trace, the Financial Industry Regulatory Authority's bond-pricing service.

    ``While investors are experiencing widening spreads, from a risk-management perspective it is widely viewed as a success,'' WaMu spokesman Brad Russell said in an e-mail. ``This success, we believe, is one reason why a covered-bond market is now being viewed in the U.S. as a potentially sound tool for bank liquidity.''

    The ``relative resilience'' of covered bonds during the credit crisis should smooth the way for their adoption in the U.S., Lehman Brothers Holdings Inc. analysts led by Jack Malvey in New York, wrote in a report published today.

    Legislation may be needed for the U.S. to create a covered- bond market, Federal Reserve Chairman Ben S. Bernanke, a supporter of Paulson's efforts, told the House Financial Services Committee on July 10.

    ``One has to be careful about what one expects from the development of this instrument,'' said Skeet at Merrill Lynch. ``I don't think we can look to this one product to save the world.''
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    Re: WaMu Shows Paulson Mortgage Rescue Plan Is Perilous

    Post by car0_linex on Sun Jul 27, 2008 4:26 pm

    thank 4 share :face:

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    Re: WaMu Shows Paulson Mortgage Rescue Plan Is Perilous

    Post by sodong on Fri Aug 15, 2008 1:34 am

    thanks 4 info bro garuda rock
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    Re: WaMu Shows Paulson Mortgage Rescue Plan Is Perilous

    Post by Prodip2007 on Sun Aug 17, 2008 10:25 am

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