Paulson's covered bonds explained...

[Mvic]

http://www.portfolio.com/views/blogs/market-movers/2008/07/08/what-is-a-covered-bond

Yet another drag on earnings for the financials. Sure it may help them survive (after all the collateral is good enough for the FED isn't it) but will kill earnings until a housing recovert and could even tempt them to start some of their old aggressive lending practices again. Anyone ready for a second round of a credit bubble?

 

[Daal]

even the bald henry paulson will be surprised by the size of the haircuts the street will demand

 

[Mvic]

Good one

My understanding is that this will ultimately be government backed as it is in Germany and Ireland which allows the banks to raise money at a preferred rate. Either way it is going to significantly impact the banks bottom like and earnins are going to be further impacted. Now they have to pay the SWF and these bond holders 1st before shareholders see any green. When all is said an done Jim Roger's call for $5 for C might be right on target.

I can understand today's relief rally in the context of these covered bonds perhaps allowing many banks to remain solvent and forsestalling mass liquidation of essentially worthless assets but when the investors think it through I think there will be a realization that the hit on earnings will be substantial and at current prices financials still do not represent a reasonable value.