Hank Paulson and Frederich the great

From http://www.bloomberg.com/apps/news?pid=20601109&sid=amy5j45Oa9Ag&refer=home
Aug. 7 (Bloomberg) -- In 1769, short of funds to rebuild Prussia after attacks by Russia, Sweden and Austria, Frederick the Great let aristocrats, churches and monasteries raise money by pledging their estates as security to investors.

From those beginnings emerged what today is Europe's $3 trillion market for covered bonds -- securities backed by assets such as mortgages as well as the seller's promise to pay. Now U.S. Treasury Secretary Henry Paulson, faced with carnage in the housing market that led to $480 billion of losses and writedowns at the world's top financial institutions, is using a similar strategy to help America's banks turn assets into cash.

While the European market has grown for 250 years, Paulson's plan confronts obstacles Frederick never faced: Besides competition from the biggest U.S. housing-finance companies, the debt would be tied to mortgages and banks that are sliding in value with America's homes and economy.

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European investors have snapped up pfandbriefe, as they are known in Germany, because they're considered almost risk free. No bank has missed a payment on the securities in at least 100 years, according to Germany's Pfandbrief Association. .....

``The covered bond has been a very useful and widely accepted vehicle in Europe, but in the U.S. it remains an expensive financing mechanism versus home-loan banks and it doesn't offer the same capital relief as a true sale,'' said Richard Dorfman, chief executive officer of FHLBank Atlanta, the Georgia Federal Home Loan Bank, which has $150 billion of loans.......

For investors, a pledge this month by 13 banks and securities firms including Bank of America, London-based Barclays Plc and Goldman Sachs Group Inc. of New York to appoint dedicated traders, provide pricing information and make a market in the bonds may be the most important development, said TIAA-Cref's Cerra. The ability to easily trade and value the debt falls short of what's available in Europe, he said.......

Another hurdle is that so-called risk-based capital rules require banks to hold more than twice as much in reserves to issue covered bonds than if they worked with Fannie to create mortgage securities, and kept the bonds on their balance sheets.

Frederick the Great's financing plan worked so well that Denmark followed suit in 1797 after a fire destroyed much of Copenhagen. By 1850, France had joined in. Whether the idea catches on in the U.S. is another question, said Richard Kemmish, head of covered bond origination at Credit Suisse Group in London and member of the European Covered Bond Council's steering committee.