Bank Panic Uncovers Fantasy Bonds
Lyndon LaRouche
November 21, 2007 (LPAC)--"Covered bonds" are very much uncovered this afternoon in the worsening dollar crash, and the entire European market for trading these asset-backed securities among banks, has been shut down for a week, in another grave sign of a gathering bank panic.
European banks were ordered by the European Covered Bond Council to cease trying to market these bonds to each other, at least until Monday, November 26. Reuters reports that this action became necessary after the price of buying derivatives contracts to insure these securities against default, shot upwards, in extremely volatile conditions. "In light of the current market situation and in order to avoid undue over-acceleration in the widening of [default] spreads," the Bond Council said it had to act.
This is a big escalation in the global financial meltdown, which is now in exponential hyper inflationary status, like Wiemar Germany was before the rise of Hitler. The covered-bond suspension hits Europe's banks in particular, because this trillion-dollar market is dominated by German banks such as Deutsche Bank. Covered bonds are one of the oldest, largest, and supposed-to-be safest parts of the bond market, even considered "surrogates for government bonds." Yet now, they cannot even be traded by banks; because "anybody would be crazy to buy them now," Lyndon LaRouche noted.
Covered bonds are asset-backed securities created from either mortgage loans, or municipal and state loans. Unlike the notorious mortgage-backed securities (MBS), the bank that owns these loan assets doesn't sell them, but rather issues its own bonds with the loans as collateral.
So covered bonds are bank debt (bonds of banks, on their own credit) and now the banks of Europe are unable to sell their own bonds, even to each other. The interbank-lending "freeze-up" in deadly effect since August, has just gotten worse.
As for issuing debt, based on "assets", which is really super inflated mortgage debt, and calling that "safe"; well, that's where the "crazy" came in, commented LaRouche.