FDIC Puts Brakes on overed Bonds

As I wrote earlier, Treasury Secretary Hank Paulson is pushing a new (for the US, at least) sort of bond, the covered bond, to unfreeze the mortgage credit markets.

Well, it looks like the FDIC just put up a road block, saying that it is considering limiting these new bonds to 4% of bank liabilities.

It has expressed concern about the instruments might place additional risk on them:

"The FDIC is concerned that unrestricted growth, while the FDIC is evaluating the potential benefits and risks of covered bonds, could excessively increase the proportion of secured liabilities to unsecured liabilities," the agency said. In other words, Back off my insurance fund. The agency did say it would consider revising its guidance after it has a chance to evaluate the effect of covered bonds on banks.

The FDIC could refuse to cover these bonds in the event of a bank failure, and as such, if they institute this policy, it may very well put a stake through the proposal's heart.

Of course, these days, all real estate loans are risky instruments.