Bloomberg is reporting Paulson Pushes Covered Bonds, Sidestepping Congress.

Treasury Secretary Henry Paulson, aiming to create a new source of U.S. mortgage financing, wants banks to start issuing covered bonds without waiting for legislation from Congress.

Paulson is promoting the debt as an alternative to mortgage-backed bonds, the securities that sparked more than $426 billion in writedowns and credit losses as delinquency rates soared. Covered bonds also offer a way to diminish the role of Fannie Mae and Freddie Mac, the troubled firms behind more than two-thirds of new U.S. mortgages, according to the Treasury.

“If they’d asked for” legislation, there would be “a question whether they could even get it done this year,” said Wayne Abernathy, an executive director at the American Bankers Association in Washington and a former Treasury official.

Covered bonds offer banks a way to raise money for new mortgages without either selling the loans or packaging them into securities. Instead, a bank issues bonds that are backed by a dedicated and regularly updated pool of loans.

In Europe, covered bonds represent a $3 trillion market that’s a primary source of financing for home loans and municipal debt. The securities have been used in the U.S. since 2006, after introductory offerings by Seattle-based Washington Mutual Inc. and Bank of America Corp. of Charlotte, North Carolina.

By substituting the word “Treasury” for “Fed” this action by Paulson is in complete agreement with Fed Uncertainty Principle Corollary Number Four:

The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission.

For a complete recap of the Covered Bond alternative please see Nature of the Fannie Mae Bailout.

Interestingly, Paulson, the SEC, and the Fed seem to be playing this situation from two different angles at once, most likely praying that something will stick before it all blows sky high.

Mike “Mish” Shedlock
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