Covered by whom? Bonds on what?

...the only way anything could go wrong would be if the issuing bank fails and the pledged assets turn out to be worth less than originally estimated. Do you think those two events might be correlated? Covered bonds can certainly be no worse, from an investor standpoint, than the nonrecourse asset pools they are intended to replace. A guarantee by the issuing bank has gotta be worth something. If it were 2002 again and the banking industry had adopted this originate and guarantee model (rather than the originate and forget model they chose), perhaps we wouldn't be in the current mess. But it is not 2002. These bonds will be offered by banks that would already have collapsed without vast support to the financial system by the Fed and the US Treasury. Guarantees by money-center banks are no longer bonds of confidence in the prudence or skill of bank managers. The value of such guarantees comes from a different place, from the notion that it is unthinkable the state would permit these banks to fail...

The great credit crisis of 2007-2008 is slouching towards its Bethlehem, a full faith and credit crisis for the United States of America. This die was cast at the first TAF auction, when the Fed chose to pull private credit risk onto taxpayers' already strained balance sheet, rather than endure any unpleasantness. Covered bonds may prove to be a success with investors. But, careful what you wish for. The more banks sell, the more we're all on the hook, if the loans go bad. Covered bonds issued by "too big to fail" banks are basically equivalent to mortgage backed securities guaranteed by Fannie and Freddie. It's just another way of putting private-sector bells and whistles on a public sector assumption of risk.