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Two Ways To Play: Banks Back Paulson


Strengthen your portfolio in good times and bad.

Bloomberg reports four of the five largest banks in the U.S. threw their support behind Treasury Secretary Hank Paulson's effort to look to the covered bond market as a source of financing for the ailing mortgage market.

Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) said in a joint statement, "We look forward to being leading issuers as the U.S. covered bond market develops."

This afternoon Paulson revealed guidelines for issuers of covered bonds, which specify the type of loans that should go into the securities as well as how the payments should be made. Paulson said he believes covered bonds will help alleviate some pressures in the U.S. mortgage market that now depends on Fannie Mae (FNM) and Freddie Mac (FRE) and other government-linked entities for over 70% of funds.

The formal definition for covered bonds is ones with maturities between one and 30 years. Home loans in covered-bond pools would have a maximum loan-to-value ratio of 80%, and unlike mortgage-backed securities, these involve loans that remain on the balance sheets, and issuers swap out underperforming loans.

Read Professor Bennet Sedacca's Fishing For Bailouts.

From the Bull Pen: In days like this, we look for stocks that have gone against the trend. One stock, Kroger (KR), held up relatively well, leading us to ask, "Is Kroger a buy off of its 200 DMA ($26.80)?"

From the Bear Cave: We've mentioned the real estate ETF (IYR). Is the stock headed for its July low? Bears can press the downside. Near-term buy-stops can be set above today's high $62.60.
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