North America

A noose of market speculation and rumour tightened around Lehman Brothers this week pushing five year default protection on the venerable New York investment bank wider by 70bp to 375bp — equivalent to a lowly double B rated credit.

In brief: George Soros calls for the introduction of covered bonds based on Denmark’s traditional balance principle in an article in the Financial Times today (Tuesday).

The four US banks setting up covered bond programmes in accordance with the Treasury’s recent guidance are understood to have formed a joint working group to examine the best possible structure. Direct issuance is being targeted, as this is seen as having the best chance of attracting US investors to covered bonds.

The Treasury was flanked by key regulators and issuers when it released its Best Practices template for US covered bonds last week. The Cover asked representatives of other parts of the market what impact the authorities’ moves were likely to have on the development of the market.

A bill put forward by Republican congressman Scott Garrett is seeking to wrest control of key elements of a US covered bond framework away from the Federal Deposit Insurance Corporation and give issuers more flexibility to use the product, while tightening key investor protections.

Here is the US Treasury’s summary of its Best Practices. Covered bonds must comply with these to be consistent with the Treasury’s guidelines, which are included in full in its Best Practices Guide.

The speed at which the US authorities have moved to create the preconditions for covered bond issuance has been nothing short of breathtaking. However, unless market participants can find the final key to unlocking the market, it will all have been in vain.

US Treasury secretary Hank Paulson yesterday (Monday) laid out guidelines for covered bond issuance in a co-ordinated move with regulators, current and potential issuers, and intermediaries that is aimed at kick-starting the covered bond market in the US. Some market participants are now hopeful that several issues could emerge this year, with three new issuers in the pipeline.

The Securities Industry & Financial Markets Association, leading broker-dealers and Tradeweb yesterday (Monday) announced plans to ensure that any covered bonds issued on the back of the Treasury’s Best Practices will have the infrastructure and support necessary to ensure a functioning, liquid market.

Moody’s has put Washington Mutual Inc’s senior unsecured Baa3 rating and WaMu Bank’s Baa2 rating on review for downgrade, making the possibility of a downgrade of the bank’s A2 covered bonds more likely.

The Treasury is expected to follow up on the Federal Deposit Insurance Corporation’s recent covered bond policy statement with an announcement next Monday that will firm up the US framework and could grant the instrument further special treatment.

The 4% limit on covered bond issuance as a percentage of total liabilities is one of the most restrictive parts of the policy statement released by the Federal Deposit Insurance Corporation last week. The Cover spoke to the Independent Community Bankers of America about their views on the cap, and whether pooled issuance was a prospect in the US.