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Capital Markets

Covered bonds ride bank failures

As the financial turmoil claims its latest victims, holders of covered bonds see the strength of their investments.

Fritz Engelhard, Barclays Capital

"JPMorgan had the option not to take on the covered bonds but wanted the assets attached to them... but if it had not taken on the secured liabilities, it could not have taken on those assets"

Fritz Engelhard, Barclays Capital

The failure of Washington Mutual does not just spell the end of the largest savings and loan in the US, but also of one of the nation’s two covered bond issuers. At a time when Treasury secretary Hank Paulson is trying to facilitate the launch of domestic covered bonds in the US as a viable mortgage-funding tool, the rescue of WaMu by JPMorgan could have significant implications for that sector. In taking over WaMu, JPMorgan was able to pick and choose which of the failed bank’s liabilities it wanted to take on. It has not taken any unsecured or subordinated debt but it has taken on WaMu’s outstanding covered bonds. "JPMorgan had the option not to take on the covered bonds but wanted the assets attached to them," says Fritz Engelhard, director of European fixed-income strategy at Barclays Capital.

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