Four of the largest banks in America, together with the U.S. Treasury, are planning to launch a new investment vehicle in an effort to revive a slumping housing market. The four banks, namely, the Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, said on Monday (July 28) that they will be issuing covered bonds soon. They estimated that the issuance might reach US$1-trillion.
Covered bonds are widely used in Europe. They are secured by pools of assets like home loans. Unlike mortgage securities that pass all the risk to investors, covered bonds continue to perform even if the mortgages backing them default for as long as the bank remains solvent since covered bond loans stay on the balance sheet of the issuing bank, which mean that they are obligations on the bank. On the other hand, the issuing bank retains control of the assets that back the loans, normally high-quality home mortgages in good credit standing.
Meanwhile, in a related development, troubled investment bank Merill Lynch & Co. announced this week that it will take a US$5.7-billion write-down on the 3rd quarter. In a sign how troubled the investment bank's debt holdings have become, it has agreed to a fire sale of its US$30.6-billion collateralized debt obligations (CDOs) to an affiliate Lone Star Funds for merely US$6.7-billion. The deal only shows how big the impact is of the subprime crisis to major banking industries.
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