U.S. Financial Institutions Explore Covered Bonds Beyond Housing

To the extent that people in the U.S. have heard of covered bonds, they think of them in the context of real estate mortgages.  That’s because in early 2008, former Treasury Secretary Henry Paulson publicized the investment vehicle as a possible aid to America’s home financing problems.

But the push for covered bonds soon was overtaken by events.  As home mortgage troubles mounted, the U.S. government executed a de facto takeover of mortgage giants Fannie Mae and Freddie Mac, then apparently gave them a bigger role than ever in efforts to resolve the housing crisis.  Since then, banks that publicly backed the covered bond concept in support of Paulson’s efforts—including Citigroup and Bank of America—have found themselves struggling to cope in a deteriorating financial sector.

Even so, interest in issuing covered bonds has not completely disappeared in the U.S.  Instead, it seems to have shifted to other types of financing.

In a discussion on covered bonds at the big ASF 2009 event in Las Vegas this month, panelist Elizabeth Padova Hanson said the covered bond vehicle could be used for securities backed by credit card debt or student loans.

"I think it can work with different asset classes, and I don't see a reason why you wouldn't expand it," SNL MarketWeek quoted her as saying.

In fact, Padova Hanson is directly involved in efforts to use non-real estate asset classes, according to a story in Asset-Backed Alert (Feb. 20).  She is working to set up issuing platforms with several credit card companies.  

In theory, covered bonds with pools using credit card debt as assets could provide lower cost of funds than existing card funding vehicles.  Capital One, Citigroup, and Discover reportedly are considering such deals.

Padova Hanson heads the covered bonds unit of RBS Greenwich Capital Markets and represents that company on the Steering Committee of the U.S. Covered Bonds Council.  According to Asset-Backed Alert, she has also been exploring the possible application of government guarantees to covered bonds.