LONDON, Dec 16 (Reuters) – Standard & Poor’s on Wednesday put about 1.46 trillion euros ($2.127 trillion) worth of covered bonds on credit watch negative or developing, based on new criteria for rating such securities.
$2.12 trillion worth of covered bonds?!
What is a covered bond again?
Covered bonds, usually rated triple-A, are regarded as low risk because they are backed by mortgage assets or loans that remain on the issuing bank’s balance sheet, but the credit crisis prompted S&P to revisit the way it rated them because of concerns over what would happen in a bank default.
Oh, mortgages and loans eh?
Is this sort of “AAA” the same sort that our subprime MBS got?
So let’s see. Instead of selling the loans we keep them and then sell bonds against them, thereby “covering” them with the “asset.” This works great until the underlying collateral quality goes to hell and the borrower defaults, at which point the bondholder has recourse against the issuing bank!
When that issuing bank is geared at 60:1 (as some in Europe are) guess what happens?
This is the definition of “AAA” right? A bank that is geared up 30, 40, 50, 60:1 – and that’s the ultimate recourse on the bond?
How do you say “debt pyramiding” – an act that every competent underwriter or credit analyst knows is a serious risk? But no! We should rate this eurotrash “AAA” so we can find suckers, er, “investors”, who will soak up this trash and make even more risky lending possible!
I think we need a new rating: TOP – for “Triple Ocular Penetration” (thanks to the forum but I can’t find the person’s login to credit him or her properly :-> ) – and we should definitely assign these “covered bonds” this new rating.
Oh and these crafty bankers would never get themselves into a duration mismatch problem would they? You know, sell short-term bonds against 20 or 30 year loan obligations – thereby putting them at risk of a rollover problem (where rates have spiked in the interim), making them instantly underwater (and remember, they’re levered 30, 40, 50 or 60:1 over there – with no transparency – too!)
The bonds have relatively short maturities, but the pool of underlying mortgages backing them are usually 25-30 years. This raised concerns that in a default the mortgages would not raise enough to repay the bonds.
Oh, they did do that. Geez these bankers are really smart!
“Heh sonny, hold this thing for me while I pull the pin out…. and RUN!”
All the pumpers and media shills tried to tell us that the problems were behind us, and the economy and banking system would all be ok….. let’s see, we have the PIIGS problem, we have Dubai, and now we have over $2 trillion of supposedly-“AAA” bonds that not only are the epitome of debt pyramiding but they’ve got duration mismatch problems – into an almost-certainly rising-rate environment – as well!
What could possibly go wrong?