BEWARE OF BUREAUCRATS BEARING GIFTS

If the term covered is new to you, it shouldn't be.

In the option game one can sell covered calls or buy puts and they in general meet the definition of covered as in less than totally exposed.

Much of the criticism of the ECB President Mario Draghi and the European Central Bank is it hasn't done enough of "whatever it takes." 

But the bank's new program is now underway. As the Financial Times states today:

News of the European Central Bank has begun its programme of buying covered bonds from banks in Spain, France and Germany will only whet the market's appetite for full-blown quantitative easing.

Covered bonds--considered palatable assets because they give the buyer dual recourse, to both underlying collateral and the issuing bank--are part of Mario Draghi's recipe for lowering banks' borrowing costs, boosting their lending and strengthening the ECB's own balance sheet.

Now lets jump on the Good Ship The Other Hand for a quick voyage across the Atlantic.

The Federal Reserve is not a true government entity and neither are Fannie Mae and Freddie Mac. And that gets us to the other hand.

Freddie and Fannie apparently under the guidance of Federal Housing Authority chief Mel Watt is pushing banks, according to the Wall Street Journal, "to repurchase loans that don't meet their (bank) standards."

If you smell a paradox here, try not to hold your nose in public. Once burned and forever-threatened-with fines, big banks like JP Morgan and Bank of America "have faced tens of billions of dollars of such repurchase demands. They have paid tens of billions more to settle litigation over sales of faulty assets."

So like any twice stung, MSM-vilified investor, banks took steps to protect themselves. To avoid such costs in the future, banks have put in place lending standards that intentionally overshoot the Fannie and Freddie requirements. The result of these so-called credit overlays is that it is harder for borrowers to get mortgages than regulators would like, the Journal notes.

At the same time officials at the Federal Reserve warned banks, as this headline again from the Journal, notes: "Fed Tells Banks to Shape Up or Break Up."  

Federal Reserve officials sent a warning shot across Wall Street on Monday telling bank executives they must do more to curb excessive risk-taking and improve employee behavior at their firms or face  stiff repercussions, including being broken into small pieces.

So lets see if we can get this straight. We have one central bank, the ECB, buying debt to stimulate their economy, but the bonds are hardly the most risky kind lounging around on bank balance sheets, the kind that slow down lending and consume capital. 

And here in America we have more of these ubiquitous bureaucrats telling bankers to clean up your act on the one hand but you need to relax your lending standards and, just trust us on the other, we "will provide details on what faults can trigger a repurchase even after a loan has entered a so-called safe-harbor after three years." 

You got to love the arrogance of these guys and gals. One can only wonder, recalling Dante's Inferno, if there's a special place in hell for these folks.
t. man hatter