North America

Lehman’s worst mistake was to get its timing wrong — six months ago it might have been saved by Hank Paulson. But Bear Stearns and the US mortgage agencies used up the Treasury’s willpower and that left Lehman horribly exposed and alone.

The House Financial Services Committee is set to hold hearings into covered bonds next year, according to sources in Washington, with momentum behind the product in the US having been given renewed impetus by the bailout of Fannie Mae and Freddie Mac.

• $3.9bn Q3 loss racked up after Alt-A hedging failure • $30bn plan to spin-off REI comes too late • Fannie and Freddie bailout euphoria wiped out Lehman Brothers was front, back and centre of events in the credit market this week and at the close in New York yesterday rumours gathered strength that Bank of America is poised to rescue the ailing investment bank.

Lehman Brothers began the week reshuffling its senior management in global fixed income and across the European investment bank as it attempted to put in place a team that could guide it through an independent future.

Sparebank 1 Boligkreditt and the Swedish Covered Bond Corp showed the new realities of the covered bond market this week, taking spreads to new wides to win over investors. The Cover spoke to officials at the two institutions about the thinking behind their new issues.

CIBC priced a Eu2bn debut issue yesterday (Tuesday) afternoon, successfully tackling the difficult market to show that in spite of Dexia Kommunalbank’s failure to get its jumbo public sector Pfandbrief away on Monday, the primary market remains open.

CIBC showed that the covered bond market remains open despite investors’ apparent lack of enthusiasm for Germany public sector jumbo Pfandbriefe this (Tuesday) morning, quickly reaching oversubscription on a new issue. Encouraged by this, Sparebank 1 is entering the market this afternoon with a five year deal.

Fitch last night (Thursday) downgraded Washington Mutual’s covered bond programme by two notches, from AAA to AA. The bonds have now been removed from Rating Watch Negative, with WaMu having set a new minimum overcollateralisation level.

Those seeking a simpler structure under which US banks will be able to issue covered bonds directly are confident that a template is nearing completion. However, the end result could be one that continues to differ from European models.

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.