<html><body>American Enterprise Institute September 19, 2008 [Edited transcript from audio tapes] <TABLE cellSpacing=1 cellPadding=1 width="100%" border=0> <TBODY> <TR> <TD> <DIV class=BodyText>8:45 a.m.</DIV></TD> <TD> <DIV class=BodyText>Registration</DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>9:00  </DIV></TD> <TD> <DIV class=BodyText>Introduction:</DIV></TD> <TD> <DIV class=BodyText><A class=eResources href="http://www.aei.org/scholars/scholarID.58/scholar.asp">Peter J. Wallison</A>, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>9:15 </DIV></TD> <TD> <DIV class=BodyText>Keynote Address:</DIV></TD> <TD> <DIV class=BodyText>Neel Kashkari, Department of the Treasury</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>10:00 </DIV></TD> <TD> <DIV class=BodyText>Presenter:</DIV></TD> <TD> <DIV class=BodyText>U.S. Representative Scott Garrett (R-N.J.)</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>10:30 </DIV></TD> <TD> <DIV class=BodyText>Panelists: </DIV></TD> <TD> <DIV class=BodyText>Greg Baer, Bank of America</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Bert Ely, Ely & Co.</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Jason Cave, Federal Deposit Insurance Corporation</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><A class=eResources href="http://www.aei.org/scholars/scholarID.88/scholar.asp">Alex J. Pollock</A>, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Tim Skeet, Merrill Lynch & Co.</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Moderator:</DIV></TD> <TD> <DIV class=BodyText>Peter J. Wallison, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>12:00 p.m.</DIV></TD> <TD> <DIV class=BodyText>Adjournment</DIV></TD></TR></TBODY></TABLE>   Proceedings: Peter J. Wallison [Moderator]: We will have a very interesting conference today on a new idea for mortgage finance, and we have some fascinating experts in this subject.  So, we are delighted to have an audience that can participate.  The way we will do this, as usual, is we will have a presentation first by Neel Kashkari of the Treasury Department who is our Keynote Speaker, and then we will go through a number of other speakers.  I know you are anticipating some important talks by some of our people on the panel.  But, after Neel we will have Scott Garrett, Congressman from New Jersey, who has some legislation on the same subject as covered bonds.  And then we will go into a general discussion by the panel and among the panel, and finally questions from the audience.  So, if you have questions as you hear things said, please note them down so we can deal with them when we get to the final hour. Now that it has become indisputably clear that Fannie and Freddie are backed by the federal government, some change in our system of housing finance is essential.  We cannot continue to pursue a structure in which the profits go to the shareholders and the managements of these two companies, but the losses are picked up ultimately by the taxpayers.  There will be many proposals for reform, but the likelihood, I am afraid, is that Congress will want to retain Fannie and Freddie as they are.  And the supporters of these two companies will undoubtedly argue that the new regulatory structure that was put in place late in July will prevent any problems in the future.  This is the same argument that was used when the original regulatory structure was adopted in 1992.  And unfortunately once again, it is likely to be a winner.  This outcome, however, becomes a certainty if there is no other system of housing finance in place.  And so the conference today is one that will attempt, at least, to look at some of the alternatives -- at least one major alternative -- to replace the system we are using today. We are already hearing from Capitol Hill that Fannie and Freddie are the only vehicles for creating the traditional U.S. 30-year fixed-rate mortgage.  And suggestions that anyone who would close them down must make clear how the mortgage market would possible operate without them.  Covered bonds are one of the alternative financing methods that could in the future replace GSE securitization and the originate-to-distribute approach it spawns as the principle mechanism for financing residential mortgages.  This is actually the second conference on alternatives to Fannie and Freddie.  In March 2004 -- I am afraid a little bit prematurely -- and as part of our long inquiry into the policy implications of the GSEs, we held a conference on residential financing systems that are employed in Europe focusing particularly on the very interesting Danish system.  In your folders you will find a paper on the Danish system prepared by the IMF and you might profitably take a look at that.  The Danish system has similarities to both securitization and covered bonds and deserves serious consideration particularly because it operates successfully without any government support. In Denmark every time a mortgage loan is made, the lending bank issues a bond to fund it.  Mortgage banks in Denmark finance and take the credit risk at mortgages, but do not take deposits.  The terms of the bond issued by the Danish mortgage bank match the interest and maturity of the mortgage loan.  So, the mortgage bank does not take any interest rate risk.  The bonds are collateralized by a pool of identical mortgages and are callable, so the borrowers pay a premium on issuance for the right to prepay.  Neither the mortgages nor the bonds are due on the sale of the home, so a low-rate mortgage becomes a valuable element in the home selling price.  Credit losses are very low in Denmark largely because an 80 percent loan-to-value ratio is required and mortgage loans are made with recourse. The most interesting part of the Danish system is that borrowers have the right to buy back the mortgage bonds that finance their homes when interest rates rise.  Higher rates cause the bond to decline in value and by purchasing it homeowners, in effect, create equity in their homes by reducing their mortgage obligation.  In effect, they are paying a slightly higher interest rate on a lower principal amount.  I will not go into all of the details.  Of course, the discussion in your folders will be interesting reading.  But, the point here is that the Danish system allows the creation of the fixed-rate 30-year mortgage that is said to be the hallmark of the U.S. GSE system, but does this without any government support. We should explore other systems for residential finance including changes in the laws and regulations that will reduce the risk of holding mortgages and the costs of refinancing them.  Due-on-sale clauses, non-recourse mortgages, and lower loan-to-value ratios can all affect how stable our mortgage system is. The important point is that the subprime meltdown is proof that we have been using a residential mortgage finance system that has large elements of instability and risk built into it, and we should be looking for alternatives before Fannie and Freddie come back to life and resume their svengali-like control of Congress. In the conference today, we will look at covered bonds as one means of financing residential mortgages.  One of the key issues in the covered bond proposal is that -- is the need to address the FDIC's concern that insured banks could place some of their best assets in the cover pool and thus expose the FDIC and the entire banking system to greater losses in resolving a failed bank.  Issues like this turn out to be difficult and have compelled the FDIC to place significant limitations on the use of covered bonds by insured institutions.  But, the Danish system reminds us that covered bonds can be issued by institutions that do not take deposits.  In other words, there is no obvious reason why once the way is open for alternatives a covered bonds system for financing mortgages could not be constructed outside the regular banking system.  This would avoid conflicts with the priorities of the FDIC and the insured deposit system.  An entirely separate group of financial institutions could offer mortgages that are financed by covered bonds.  There is no inherent reason why in the efficient capital markets we have today that we should still be financing long-term assets like mortgages with short-term liabilities like deposits.  As everyone knows by now, and it was demonstrated clearly in the collapse of the S&Ls, this is a prescription for instability, for moral hazard, and we now know, for a taxpayer risk.  Covered bonds offer the possibility of a more stable system of mortgage finance by closely matching long-term mortgages with long-term financing.  They also have other advantages that will be outlined in today's conference.  What we should be thinking about is how to take maximum advantage of the benefits covered bonds offer while minimizing the issues they create for the FDIC.  The collapse of the S&Ls, and now Fannie and Freddie, should be convincing evidence that we have to find another way to provide the American people with a system of financing home ownership.  Going back again to the old way by resuscitating Fannie and Freddie is not, in my view, the right answer. Well, I want to thank all of you for coming, and I want to introduce our Keynote Speaker, Neel Kashkari.  Neel is an assistant secretary of the Treasury and has been that for over, well, about a year and a half, and he is now the assistant secretary for International Economics and Development.  Prior to his nomination as assistant secretary, he was a senior adviser to Secretary Henry M. Paulson.  One of Neel's specialties, it seems, is developing and implementing new ideas.  He did this before he began his career in finance when he worked at TRW developing technology for space missions, when he was at Goldman Sachs in San Francisco and a head of the security firm's investment banking business, earlier at Treasury when he led Treasury's involvement in the administration's plans for developing alternative energy sources, and now when he heads Treasury's work on developing covered bonds as an alternative source of energy for the mortgage finance market.  He has an engineering degree from the University of Illinois and an MBA from the Wharton School.  I hope you will join me in giving a warm welcome to Neel Kashkari.  [Applause] Neel Kashkari:  Thank you. Peter J. Wallison:  Oh, let me say one more thing.  Obviously, there is a lot of interest in what Treasury is proposing to do in the financial markets, and Neel is here to talk about covered bonds.  So, after he is finished with his presentation on covered bonds, we will be taking questions.  But, I would like you to limit your questions, please, to covered bonds.  And if you want to know more about what the Treasury is doing or the Treasury is planning, contact the Treasury Department.  But, Neel will talk about covered bonds.  Thanks, Neel. Neel Kashkari:  Thank you very much, Peter, and thanks to AEI for having this.  This is a really important topic and very timely, and I appreciate having me here.  So, what I would like to do today is talk to you about Treasury's approach, housing very broadly, but mortgage finance more specifically, and the role that we think covered bonds can play in mortgage finance in America going forward.  And then I am happy to take your questions. Our housing market objectives.  When the housing correction began, we laid out a series of objectives that we still think are the right objectives.  Number one, avoid preventable foreclosures, and we have had whole huge initiatives to try to do that.  Number two, ensure the availability of mortgage finance.  We need to make sure mortgage finance is flowing to get through the correction, but then longer term.  Number three, we need to, excuse me, enable the necessary correction to move forward as quickly as possible.  We are having a necessary housing correction.  We do not want to do anything to slow it down.  We need to get through it so that we can get housing growing again.  And then number four, minimize spillover from housing to the rest of the real economy.  Now, covered bonds is going to fit under the second bullet there, ensuring the availability of mortgage finance.  We have taken an approach that there is no silver bullet in the housing market.  There is no one tool that is going to solve all of our problems.  We need to turn over every stone and find every incremental tool that is going to help on the margin.  So, look here, the things that we have been focused on in terms of mortgage finance to get us through the housing correction. FHA introduced a new program last year.  It has done 350,000 refinancings in the past year.  HOPE for Homeowners.  This is the bill that the President signed that the Congress passed in July, a new refinance program.  Obviously, Fannie Mae and Freddie Mac have an enormous, important role to play, and we have taken an aggressive action to make sure they can fulfill their mission.  The home loan banks are also fulfilling their policy mission by ramping up their activity.  Improving transparency of mortgage-backed securities.  There are a lot of reasons that we got into the mess that we are in one of which is in a private-label mortgage-backed security market there has been very poor transparency.  Very hard for investors to know what are the actual loans that are in the mortgage-backed securities?  Are they performing?  Are they delinquent?  That has been a key challenge.  And so the American Securitization Forum has put together a task force to try to come up with detailed data -- 200 data fields on loan, by loan, by loan, and standardize it across the industry so that investors will know in new mortgage-backed securities what is in there and they can have confidence.  That is a really important factor, because we think securitization is going to come back, and it has an important role to play.  And then we have got covered bonds.  Again we do not think covered bonds are a panacea, but we think it is one more tool.  And we need to be exploring all tools to encourage mortgage finance in America. All right, so let us look at how do banks or originators fund new mortgages.  Look at the left hand side off balance sheet.  So, let us say I am a bank and I originated a whole bunch of loans.  I could sell those loans and get them off by balance sheet.  So, I could take the loans and sell them to an investor who wants whole loans.  I could securitization them -- private-label securitization -- and sell those securities.  Again they are now off my balance sheet.  They are no longer -- I no longer have responsibility for them.  I could sell them to Fannie Mae or Freddie Mae -- GSE securitization -- or I could originate them into FHA and then it becomes a Ginnie Mae securitization.  Again it is off of my books.  I do not need capital.  I do not need any more funding for that. On balance sheet, the alternatives are deposits.  So, I originate a bunch of loans.  I am going to hold them, but I use my deposit base from my customers to fund those mortgages.  I retain the mortgages.  Unsecured debt.  So, I originate the mortgages.  I issue debt into the capital markets.  I keep the mortgages, and I pay on that debt.  Or federal home loan banks.  So, I originate the mortgages, and I put those mortgages to the home loan banks as advances.  I still own the mortgages -- that is collateral for the home loan banks -- and I get funding from the home loan banks.  So, you have got off balance sheet.  You have got on balance sheet. Now, let us look at what has happened over the last several years.  This chart looks at the various sources of mortgage finance from 2002 to today.  The red at the bottom is private-label securitization.  You can see how it really ramped up '04, '05, '06, first half of '07.  The green are the GSEs, Fannie and Freddie; the blue, balance sheet lending; and the yellow, FHA. So, in the credit crisis that we have had, securitization has really dried up.  Fannie and Freddie have raised their activity, as appropriate, fulfilling their policy role.  Balance sheets have taken on more and more loans, so banks have been looking for more sources of funding -- and FHA has really expanded their activity -- but you can see, even though these other categories have increased the overall net is a reduction in availability of mortgages. Now look -- let us look at the home loan banks.  Again, this is an on balance sheet funding tool, so the bank retains the mortgage, but the home loan banks are funding it.  You can see how they have ramped up their activity; roughly $450 billion in '01; $850 billion or so currently.  So, they have really ramped up as a source of funding for on balance sheet finance. So, despite this, Fannie and Freddie have ramped up their activities.  FHA has ramped up their activities.  Home loan banks have ramped up their activities.  Look at where spreads are to Treasuries for homeowners.  Prime, non-traditional -- which I think is Alt-A -- and subprime spreads are still much, much higher than they have been.  So, there is a need for more mortgage finance clearly certainly today, but even long term. So, where are covered bonds?  Where would they fit in?  This is the same chart I showed you a minute ago.  Covered bonds are an additional source of on balance sheet financing.  I am going to walk through it in detail, and then you are going to have a very active discussion after I am done.  Again, there is no silver bullet.  It is an $11 trillion mortgage market.  Our view is there is a role for all forms of mortgage finance.  We are not picking a winner here.  We think they all have a role to play.  So, what is a covered bond?  As I said, depository institution originates a bunch of loans.  It holds those loans in a pool.  That pool is collateral for a bond that it issues.  So, if I am the bank, I retain the credit risk.  I have to -- all of that credit risk comes to me.  And if any of those loans go delinquent, I am going to pull those out and replace them with new performing mortgages.  You as a debt investor in the covered bond, this is just collateral.  It is just security for you.  So, you would have dual recourse.  If anything were to happen to the bank, you would have recourse to the bank -- or first to the cover pool and if the cover pool is not enough then to the bank.  So, I had never heard of a covered bond a year ago.  It took me awhile to get my head around it.  Think about an industrial company that issues secured debt secured by receivables or some other assets.  Same thing, a covered bond is just a secured debt offering where the collateral happens to be mortgages.  And again you have to maintain a high quality collateral to meet your requirements to the debt investors. And importantly -- I am going to talk more about this in a second -- in a mortgage-backed security, the cash flow from the mortgages that are sliced and diced are what pay the interest and the principal on that security.  In a covered bond the issuer -- let us say Bank of America -- Bank of America's cash flows pay the cash flow on the covered bond not the actual mortgages themselves.  Those mortgages purely are collateral and that is an important distinction. So, history of the covered bond market -- you probably know this -- it is roughly a $3 trillion market largely in Europe. It is a couple hundred years old; although, it really took off in the '90s.  It is used for municipal, so public sector debt, residential mortgages, commercial mortgages.  In Europe you are going to hear a lot about this today.  A lot of European countries have what are called legislative framework.  So, it is a dedicated piece of legislation that says, "This is what a covered bond should look like.  This is what the regulatory environment is going to be.  This is what the disclosure requirements are going to be."  And it is all buttoned up nice and neat in one piece of legislation.  Some countries, including the U.S., do not have covered bond legislation.  We have what is called a structured framework where we have different pieces of law -- I am going to talk more about this -- that stitch together -- try to do the same thing.  In the U.S., two institutions have issued covered bonds to date.  And another important distinguishing factor, we have the GSEs, and we have the home loan banks.  They do not have those in Europe.  So, we should not set expectations that covered bonds are not going to become necessarily the dominant form of mortgage finance in America because we have these other alternatives.  In Europe they do not have the GSEs or the home loan banks and so they have [inaudible] in some markets have heavily relied on covered bonds as their primary source of mortgage finance.  So, again, let us talk through some of the difference between covered bonds and mortgage-backed securities.  I talked about the collateral -- again, let us go to the third row.  Is it a source of a capital?  A covered bond is a funding source.  So, if I own all the mortgages -- I am a bank -- I have to have capital behind those mortgages.  Covered bonds does not solve my capital problem.  It is a funding tool, but that is true with the home loan banks too.  If I put the mortgages to the home loan banks, I still need to have capital underneath those home loan -- excuse me -- underneath those mortgages that are now placed at the home loan banks.  That is an advantage that mortgage-backed securities have is because you are selling the mortgages off your books it is no longer a use of capital, so it is important distinguishing. Dual recourse.  Again, covered bond investors have resource to the collateral pool and to the issuer.  On secured debt they do not.  And then acceleration and prepayment.  This is another important concept.  A lot of investors in Europe think about covered bond as what is called a rates product as opposed to a credit product.  So, if you are a fixed income rates investor, you look at this and you are making an assumption that there is no credit risk.  You are making an interest rate investment rather than thinking that I need to analyze all of -- whether or not this issue is going to go insolvent and make a credit analysis.  Similarly, with U.S. Treasuries, that is a rates product, not a credit product, because you are just making an interest rate investment not betting on the credit of the U.S. government.  So, one of the things that rates product investors want is they do not want the bonds to accelerate.  So, that means if I am a rates investor and I invest in a 10-year bond, I want to know for the next 10 years I am going to get the coupon payments when I think I am going to get them.  I do not want the bond to accelerate and get my cash back five years early because that means I have to go find some place to put it for another five years.  So, one of the features of the U.S. covered bonds is that there is what is called a GIC -- a guaranteed investment contract -- which means that if an issuer goes insolvent, the collateral gets either liquidated and -- that cash from that collateral goes into this contract.  It is another financial institution that is standing by to make the rest of the payments.  So, it is a structural feature that has been built in to make sure that the covered bond, if the issuer goes insolvent, continues to make the payments for the life -- the original maturity of the bond.  So, again, these are detailed -- technical details -- but these are -- end up being really important.  As -- compare that to a mortgage-backed security.  If the loans refinance more quickly, you get your cash back quickly.  Or if a loan goes delinquent in a mortgage-backed security, your cash flow is reduced.  So, the covered bond programs have a lot of detailed features built in so that they maintain exactly the cash flows that they are supposed to over the life of the maturity.  They do not come in short, and they do not come in more quickly than you would expect.  Again, I am giving you a lot, I know, but I think it will be useful as you have your discussion this morning. So, now let me tell you now what our approach has been to this.  We have looked at this and said, "How would we kick-start a covered bond market in the U.S.?"  We started out by reaching out to market participants around the world: investors, potential issuers, existing issuers, broker-dealers, rating agencies, law firms, anybody you can think of to solicit ideas.  What would be the key features to help kick-start a covered bond market in the U.S.?  What would you like to see if you were going to get involved in the covered bond from any of those perspectives?  We also worked extensively with the other regulators, so in the U.S. very closely with the FDIC.  They have a very important role to play as well as the Federal Reserve, the OCC, the OTS, and the SEC, and as well as foreign governments, and foreign central banks, etcetera, especially those governments that have a lot of experience in their own markets with covered bonds to understand what has worked and what has not worked. We have looked at -- our objective has been to try to balance structural certainty -- and I am going to explain to you what I mean by that -- with still allowing the market to innovate.  So, one of the keys is that -- as I have thought about the possibility for legislation in a covered bond, it is great if you can button everything up and say, "This is what the market should look like."  But, how do you do that in a way that does not then stifle the market from then innovating on its own and taking off in new important directions?  So, we have been trying to find that right balance as well.  And then our role as Treasury has been to try and find leadership to encourage the market to move.  And so there have been a lot of firms on their own trying to do work.  What we have tried to do is become a catalyzing force to get the market to move all at once, because if we can all move together, we have a much better shot of kick-starting this market. So, here is what we learned from investors.  They want liquidity.  They want to know if they make this investment that they can trade it -- that there is someone on the other side.  Now, investors what liquidity today in every market and almost every market has challenges in liquidity so that is not unique to covered bonds.  But, over, and over, and over again they have been saying "liquidity" and "electronic pricing".  They want to know that they can go to a screen, press a button, and figure out what price is bond at today.  They want very high quality collateral, and they want blue chip issuers at least as a starting point for the market.  Over time you would expect to see smaller institutions, medium size institutions.  But, as a starting the investors told us, "It has got to be the blue chip names or we are not going to get going with this." Homogeneity.  So, they do not want Bank of America's covered bond to look different than your covered bond or your covered bond.  They want to know that the structure, the template, is all the same so that they can just spend their time analyzing Bank of America or analyzing the interest rate environment.  Not spending time and saying, "Well, BOA has these three bells and whistles, and you have these two bells and whistles, you have two different bells and whistles."  Then they have to spend all sorts of time figuring out what those bells and whistles means, so homogeneity was important. Regulatory clarity.  The FDIC has a really important role to play.  So, let me explain this to you.  You have these mortgages -- and Peter talked about this a little bit -- you have these mortgages on the balance sheet of a depository institution.  Heaven forbid that depository institution runs into trouble and goes insolvent.  Well, if they do the FDIC takes over and manages it -- either unwinds it or sells it.  How the FDIC treats that collateral and the respect they are going to have for the segregated collateral becomes very important to you as an investor so you know this collateral is really yours and you are going to get because that is what you were supposed to get.  So, the FDIC had to come in and say very clearly what they would do or would not do in such an environment, so that was really important for investors.  And we are going to talk more about that. Issuers said, "It has got to be cost effective.  I have got alternatives.  I can go to the home loan banks.  I can fund it with my deposits, Fannie and Freddie.  This has got to be cost effective, so there needs to be investor appetite."  Issuers said, "The broker-dealers need to step up, and they need to provide training.  They need to provide research and real market support."  And then they want flexibility.  So, the issue -- the investors want homogeneity, very high quality collateral.  The issuers want as much flexibility as possible.  We -- they want to put municipal bonds in there.  They want to put commercial mortgages in there.  Some want to put student loans in there.  But, the investors said, "No, no, no, no, no.  Keep it simple as a starting point, very high quality collateral."  So, there was a tension that we were trying to bridge. And then the broker-dealers said, "Yes, we are happy to make this market.  There needs to be issuance volumes.  We are not going to commit resources to this if there are no deals."  And the dealers also said for their own -- excuse me -- funding needs, they need to make sure it is eligible for the tri-party repo system and that the Federal Reserve would respect covered bonds and accept them as collateral at the discount window.  Sorry, when I do not get much sleep, my [Laughter] -- it is hard to speak in the morning.  So, what was our objective?  Providing homogeneity and clarity to the U.S. market -- I am going to talk more about legislation versus a structured framework -- want it to complement the FDIC Policy Statement.  We decided we want to start with residential mortgage collateral to keep it simple like the investors said, but to help the housing market.  And we want to encourage market participants to move at the same time. Again, everyone was nervous when we talked to them.  Investors said, "Yes, we are interested, but only if the dealers do this and the issuers do that."  The issuers said the same thing about the other two, and the dealers said the other -- the same thing.  So, we said, "Okay, you are all interested.  Hold hands.  Let us all move forward at the same time so no one has to take the risk of going first. Now legislative versus structured framework.  I have already talked about this.  One of the key things here -- and we have nothing against a legislative framework.  Our perspective has been we want to move fast, and we think a structured framework can be put together very quickly.  We also think just because they have legislation in Europe does not mean you have to have legislation in the U.S.  In Europe they do not have the FDIC which governs what happens in an insolvency.  We also have the Universal Commercial Code.  So, between our contracts law and clarity from the FDIC, those two things put together can provide investors the kind of legal certainty that they want in terms of what is going to happen in a covered bond. Another key point -- just for you all to think about as you have your discussion today -- as we really pushed European investors and said, "Why is a European covered bond a rates product?"  That means no credit risk.  "Why do you look at it that way?"  When we really pushed them they said -- many of them said they would never let it fail.  Literally, the regulator that is governing the covered bond in this market or that market they would never let it fail.  Sound familiar?  So, we have to be very careful if we do go forward with covered bond legislation, which could make sense, that we design it the right way so that we do not give an implicit government guarantee to a new covered bond market. On the right hand side, structured framework.  Again, I said FDIC has a really important role to play -- I am going to talk about the aggressive action they have taken -- combined with our contracts law we believe provides investors the certainty that they need to make these investments with no danger of an implied government guarantee.  And again, so we are open to both.  We think a structured framework can move forward very quickly and very effectively. So, FDIC.  They have taken bold steps to try to kick-start a covered bond market.  There are two big things that investors are asking, "What are they going to do in insolvency?  How do they make their decisions?" and, "How much are they going to pay us back?"  So, the FDIC can come into a failed bank and repudiate contracts.  Say, "You know, our contract null and void.   But then - or they could say, We are going to keep our contract because it makes sense for us to keep the contract. So, the FDIC has now come out and clarified they are going to make one of three choices.  One, they are going to continue to honor the rest of the covered bond, which you as an investor you are very happy with.  Two, they could pay off the bond in cash.  Or three, they could hand you the collateral and say, Go ahead.  You can liquidate the collateral and take the proceeds.   Just that clarification on their decision making was really important because a lot of investors did not understand how the FDIC goes about things, so that was really important. Second, they had to define what the damages would be.  So, if I am the FDIC and I repudiate a contract with you, they have to pay back damages.  But, there was uncertain amount what those damages they would pay.  Are they going to pay you the full value of the bond, or are they going to pay you less that that?  They have now come out and said, assuming the collateral is there, they are going to pay back par plus accrued interest.  That was a critical point that investors wanted to hear and the FDIC has done it.  And they have reduced a stay period from 90 days to 10 days.  That means how long is the FDIC going to take to make their decisions has really reduced it, which reduces the cost of the uncertainty of that program. Now some people have said, Well, the FDIC could have gone further.  They could have put municipal bonds in there.  They could have put commercial mortgages in there.   I think Peter touched on this -- they have a limitation right now that covered bonds cannot make up more than four percent of liabilities, which some people say, "That is too low."  The FDIC has said, Look, this is a starting point.   Over time they are going to review that four percent number and watch the market develop. So, we at Treasury are not concerned about that.  We think that is going to be a constraint.  And when you think about the feedback from investors, they said, Keep it simple.   And so the FDIC constraint on residential mortgages, we think, is totally appropriate in terms of kick-starting this market.  Once the market is up and running, then we should look at it - opening it to more classes of collateral. So, what have we done?  Aside from moving the market, we have published a best practices document that is trying to provide the homogeneity and the structure that the market participants are looking for.  So, look at the collateral -- this is consistent with the FDIC and it adds to it -- high quality mortgages, so underwritten at the fully indexed rate.  No teaser rates -- fully documented income, maximum LTV of 80 percent at origination, 20 percent limitation on -- by metro statistical areas.  So, you do not want to have -- if you are covered bond investor, you do not want all the collateral coming from Los Angeles, okay.  That is a lot of risk to you if Los Angeles has trouble, so geographic diversification is important.  No negative amortization mortgages -- so no pay Option-ARM mortgages -- minimum five percent overcollateralization.  LTVs updated monthly.  This is an important concept.  So, let us say you put a bunch of 80 LTV loans in the cover pool and if home prices drop those LTVs climb.  Well, that does not kick all their mortgages out.  That means that the issuer has to add more mortgages to top it up to make sure that there is enough collateral.  So, we have defined some standardization around those kinds of processes and more.  There is a lot more than this on disclosure, on transparency, etcetera.  You can read about it on the Treasury Website.  So, we published a Best Practices Guide that complements the FDIC Policy Statement.  We think you put the two together and that provides the kind of clarity and certainty that the market needs to get started without overly constraining the market going forward.  So, we have done our thing.  FDIC has done what they needed to do.  Dealers have all come together -- SIFMA created.  We encouraged them.  They were happy to do it.  U.S. Covered Bond Trader's Committee with all the major broker-dealers have come together and dedicated - they are going to have a committed U.S. covered bond trader.  They are going to provide liquidity and trading - they are going to provide resource - excuse me -- research and other resources.  And then they are going to work on a Covered Bond Council.  In Europe, they got this big trade group, European Covered Bond Council.  They are now working on setting up something similar in the U.S.  Again, so the dealers are showing to investors and issuers that they are committed to this. So, what do we need to do to kick-start the covered bond market in the U.S. in our opinion?  Regulatory clarity, FDIC has given it.  Simple homogeneous structure, standardization, high quality collateral -- we believe our Best Practices Guide provides that.  Tri-party repo eligibility -- Bank of New York, JPM have already come out and confirmed it.  Discount window eligibility -- Federal Reserve has come out and confirmed it.  Broker-dealer commitment -- SIFMA has mobilized their broker-dealers.  They are backing it.  Electronic pricing -- Bloomberg and TradeWeb are now setting up electronic screens so traders can see prices as they are updated in real time.  Strong support from institutional investors -- here are some of the institutions we have been working with who have spoken at different times in support of this.  These are the - you know, the bluest of "blue chip" names of fixed income institutional investors in the U.S.  And then blue chip banks -- we need them to issue.  And we had a roll out in July with the Secretary Chairwoman Bair, other regulators, where we had representatives from Bank of America, Citigroup, JPMorgan, and Wells Fargo -- kind of the four biggest blue chip names -- who have all said yes they want to be leaders in covered bonds.  So, we feel like that is the last piece of the puzzle to try to get a covered bond market going in the U.S. So, what are our next steps?  Look, this is a tough environment in which to launch a new financial product, okay.  No question about that.  But, never has the market needed this financial product as much as we need it right now.  So, it is worth the effort of all of us, and that is why I am so happy you guys are having this session, and you are all here and there is so much interest.  Some people have said, Well, look at Europe.  Look at the covered bond market in Europe is strained right now.  This does not work.   There is no financial product short of a government -- U.S. Treasuries -- that is going to be immune to capital market stresses.  So, we should not say, Covered bonds need to be perfect or it is not worth pursuing.   We need to pursue all of these.  Issuers are doing their work, setting up their programs, working with regulators for their necessary approvals.  We would expect to see likely issuance in months.  And dealers and investors are doing their work to be ready.  I was really encouraged when we had our big announcement how much Wall Street research started getting generated on covered bonds.  A lot of U.S. investors do not know much about covered bonds.  So, one of the things we have already achieved is opened the eyes of investors to say, Hey, what is this product?  I need to get smart about it.   And that is going to help when the issuers come to market.  So, again, we are trying to move the whole market at once, and we are really optimistic that we can really kick-start this market.  That is all I have.  I would be happy to take a few questions.  Thank you very much, Peter.  Peter J. Wallison:  Great.  [Applause]  All right, we have some time for questions. Male Voice:  Are your slides going to be made available? Peter J. Wallison:  Yes, the slides will be on our Website for this conference -- if you go to AEI.org and look for this conference.  In the back -- and would you please identify yourselves and ask your question? Yes, I am Joe Knoll from the law firm of Krooth -- Peter J. Wallison:  Wait, wait --  Male Voice:  I need the -- Peter J. Wallison:  -- can you wait for the -- Male Voice -- microphone. Joseph Knoll:  My name is Joe Knoll.  I am a lawyer with the law firm of Krooth & Altman here in town.  Neel, two unrelated questions.  One would be the role of the rating agencies.  Are we trying to create investment grade paper?  And if so, are you rating the issuer rather than the collateral?  And if so, are not we in a climate of a rapidly diminishing pool of investment-grade issuers?  That would be one question. The second unrelated question is, what are the implications of a default in the pool where you have got some back mortgage - the issuer does not have any substitute collateral to put in, the bondholder is very happy with his bond receiving his payments every month, he does not want them yanked.  What happens in that instance? Neel Kashkari:  So, let me do - I will do the second one first.  So, it is a dynamic pool and the - any issuer who is going to issue a covered bond, I think, is going to have to be an active mortgage originator.  Because you are right, if a loan goes more than 60 days delinquent, they have to pull it out and replace it with a new mortgage.  And there is some substitution flexibility, so you could do cash, or treasuries, or agency mortgages, I think, up to 10 percent just to help you bridge any timing issues.  If you do not have enough mortgages available this week, you could put in cash to top it off to meet your requirements.  But, I do not think a covered bond would work if you were just - you originate 1,000 loans and you are never going to originate any more loans, I do not think a covered bond is a good tool for that type of an issuer.  Does that make sense? Joseph Knoll:  I am just curious what would happen if they just do not do them? Neel Kashkari:  Well, then I think if they just do not replace the mortgages the bond will default.  It will accelerate and they will have to pay it back because they will be in violation of their covenants.  So, it is a contractual arrangement.  If you are investor, you want to know that the issuer is living up to their obligations and this is - these are the terms of the investment that you have both made at the start.  So, if for some reason they sell - they do not meet their collateral requirements the bond would accelerate. So, number two, rating agencies - obviously, in fixed income markets rating agencies have an important role to play.  Each rating agency has been publishing on covered bonds.  Each has their own approach.  Each looks at both the credit quality of the issuer as well as the credit quality of the collateral because both end up being important.  Because as an investor, your first recourse is the collateral pool, and if that comes up short, your next recourse is to the issuer, as well as the likelihood that the issuer goes insolvent, determines how likely you are going to need that collateral.  So, they both have very important roles to play and all the major rating agencies have published and are publishing their approaches to that problem. Alex J. Pollock:  Neel, could we just add, the rating agencies are very accustomed rating covered bonds because they rate lots of European bonds already. Neel Kashkari:  That is right. Peter J. Wallison:  Okay, next question.  Allen [phonetic], would you hold on let us wait for the mike.  All the way up in front, second in, in the second row.  And identify yourself -- Allen Elowitz:  Hi, I am Allen Elowitz [phonetic] of Visia B [sounds like].  I have to say -- and please do not take this the wrong way -- but I get very, very uncomfortable when I see the government trying to promote financial market innovation.  The last industry that needs government help in innovating is the financial sector.  We lead the world in financial innovation.  And if there was a real value we really need here, it was, there s no question in my mind that financial markets are not Allen Elowitz:  Is this censorship?  Is this -- [Laughter] Allen Elowitz:  There s no question on my mind that financial markets on their own would have long ago since figured out how to do this and they would have done it. So, I have to say that I have a lot of discomfort with having financial market innovation being pushed by the government.  That is number one.  Number two, there are all sorts of differences between the way the Europeans run the covered bond market and the way you proposed a structure in this country and most differences are significant.  For example, the European bonds, as I understand it, are substantially more overcollateralized than what you are proposing.  How do you deal with that?  Secondly, other than Danes, the Europeans all deal with the adjustable-rate mortgages.  They have prepayment penalties, all sorts of other things.  You can assure constant maturity if you have prepayment penalties built into the mortgages.  So, there are tremendous structural differences between housing finance in Europe and housing finance in the United States.  And it is not clear to me that your proposal on the covered bonds, in fact, assimilates and is consistent with these differences. Third, despite your concern over creating systemic risk and having the government on the hook, as long as the issuers are depositories that are insured by the FDIC, and the fact that the government is insuring all this stuff because we are taking collateral off the balance sheets of insured depositories that could be used to make depositors whole, that makes me uncomfortable.  And lastly, the presumption here is somehow that investors cannot deal with the prepayment risk associated with mortgage-backed securities.  For the life of me, I have seen no inability on the part of the financial markets to absorb mortgage-backed securities at a prepayment risk.  Those investors are compensated for that -- by that -- for that risk with a higher yield.  So, you have not made the case, for me, as to why the government should be innovating rather than the major plays in the financial market.  You have not demonstrated the overwhelming need here.  You have not demonstrated how it reconciles with the difference between our market and the European market.  You have not demonstrated how it makes sure that taxpayers are not on the hook.  And lastly, you have not demonstrated a need in terms of the market's ability to absorb mortgage-backed securities and the prepayment risk.  But, other than that, how did you enjoy the play, Mrs. Lincoln? [Laughter] Neel Kashkari:  I was waiting for the question.  [Laughter] Also -- Peter J. Wallison:  Can you come and get the mike? Neel Kashkari:  I will say the -- please -- [Laughter] [Applause] No, just kidding.  I will say the following, on the point of the market --government's role -- you know, I was a - I am a free market Republican.  And one of the observations I will make, for the first - for the last year, one of the things I have been doing at Treasury is working with all the servicers and the counselors and getting them to mobilize in HOPE Now.  Markets are strained right now and it is hard to just say -- as much as I would like to believe, "Just let them free and everyone is going to work out their own problems."  We are under a lot of pressure right now.  All of us are feeling a lot of pressure.  And a lot of people have come to us and said, Thank you for taking a leadership on covered bonds because we are interested in this.  We did not know everybody else was interested.  And by Treasury providing - with working with the FDIC and the other regulators -- providing leadership, a lot of people have now come to the table and said, 'Yes, we really want to do this.'"  And so I think it maybe would have happened anyway.  Maybe it is going to happen faster because we are trying to get people to hold hands and do it at the same time.  And it is not going to be perfect.  We are going to learn from this and the market is going to innovative. In terms of - I am not going to answer all your questions.  We can talk off line -- in terms of the mortgage-backed securities and prepayment, the key is they are different classes of investors.  So, there are investors who want prepayment risk, who like prepayment risk, and who want to pay for prepayment risk.  There are other investors, who are traditionally these rates investors I talked about, who do not want it.  And what we are trying to do is open housing finance to another category of investors who currently do not invest in housing finance, because we want to bring - tap all the pools of capital to housing finance.  So, it is tapping another capital pool, not trying to force that into one that already exists.  Other questions? Peter J. Wallison:  In the back.  Can you wait for the mike, please, and identify yourself?  Thanks. Katherine Gleason:  Hi, I am Katherine Gleason, FDIC.  And I want to know which types of financial institutions besides insured depository institutions do you think would be interested in this market?  And are you at all worried about concentration that would create systemic risk? Neel Kashkari:  So, it is a good question on who is interested.  I mean, to date most of the interest we have received has been from depository institutions.  And I am trying to think of a big balance sheet lender who is not a depository institution, right, because it has to be a balance sheet lender because they are going to keep the loans on their balance sheet.  So, it is hard for me to imagine non-depository institutions, but I cannot say that it is impossible, but that is who has reached out to us. In terms of, I guess, just the largest institutions, we hope -- just -- investors have told us they want to start with the biggest blue chip names because that is who they are most comfortable in the current environment.  Our intention is that this product develops, and becomes fruitful, and that smaller institutions can tap it, and midsize and smaller banks can tap it.  And, in fact, one of the things that is in our Best Practices Guide, it talks about the concept that some markets in Europe explore where multiple small depository institutions could pool their collateral into one bigger collateral pool to then issue a common covered bond off of that.  And so that is the kind of market innovation we would like to see happen.  We do not think it is realistic to start there, but we would love to see it happen over time if the market thinks it makes sense. Peter J. Wallison:  Other questions.  Wait for the mike.  Bill.  And identify yourself please for all those who -- William Coleman, Jr.:  I am Bill -- Peter J. Wallison:  -- do not already know you. William Coleman, Jr.:  -- Coleman, and I am a partner at O'Melveny & Myers.  Assuming that I wanted to buy a house for $400,000, I put down $100,000, so I got to get a $300,000 mortgage.  I go in this deal and everything works perfectly.  How much has the lender made on the deal? Neel Kashkari:  Well, it is hard for me to answer that question because I do not know what the interest -- I mean we would have to do the detailed math.  I do not know -- William Coleman, Jr.:  Well, but all I am saying -- Neel Kashkari:  -- what the -- William Coleman, Jr.:  -- is that we -- in society, as I understand it, there are only either three of four major banks: Chase, Bank of America, and perhaps Citicorp, you know, and they are getting into different businesses.  And it seems to me that what they want to do -- of course they all want to serve the public -- but they want the big deals.  And they are not going to say, "We make enough money on this."  And if we went back to where we had many more small banks throughout the country, I think this is a perfect program.  But, if you are really recognizing today where the big banks are in bigger deals, rightfully making more money, serving the public better, I just do not see how this fits in where you make enough money to make it worthwhile. Neel Kashkari:  Well, I mean -- I could let Greg speak -- I mean the big balance sheet lenders have -- they have many, many business lines, and mortgage finance is a big business for them.  And so even though each individual mortgage may not be big in terms of dollars, when you add up their big mortgage businesses they end up -- can be very profitable especially today.  The quality of the mortgages that are being written today, very high quality underwriting standards, significant down payments, if -- they are very good, very profitable mortgage origination businesses today.  But, we agree completely.  We do not want to see concentration just in the big four banks.  All we were saying is that investors told us they wanted to see deals from the biggest banks to get smart, get going.  That would pave the way for the midsize and smaller banks to then follow.  We think that they should all be in the business.  And again we want to encourage all sources of mortgage finance right now to get through the housing correction and longer term. Peter J. Wallison:  One more question -- and I have a question actually for you, Neel, and that is why are you focusing only on depository institutions?  Why not other kinds of balance sheet lenders -- and there are plenty -- that are not depository institutions?  Why is that not part of your program? Neel Kashkari:  Well, it is just -- I guess it is two things.  One is, it is just a starting point.  So, this is who has been reaching out to us saying, "We would like to see help in kick-starting a covered bond market."  So, we started with where there was the most interest.  And I do not -- again, we do not want to rule out anything longer term.  Again we want to tap all sources of capital.  And I think working with the FDIC, obviously, they have domain over the depository institutions, and so it was useful for us to start there from a regulatory perspective and because that is where the interest was. Peter J. Wallison:  Was there any requirement and when you started talking about marketing these things that you needed depository institutions to make this thing go? Neel Kashkari:  No. Peter J. Wallison:  Did not think so.  Okay.  I guess we have time for two more questions.  Is that -- Neel Kashkari:  All right. Peter J. Wallison:  -- all right with you? Neel Kashkari:  Yes, we can have two more and then I have got to run. Peter J. Wallison:  Right here.  Wait for the mike, Meena. Meena Thiravangadem:  Meena Thiravangadem [phonetic] with Dow Jones Newswires.  How binding is Treasury's Best Practices Guide and what happens to someone who says, "Ah, good suggestions, but I do not want to follow them." Neel Kashkari:  So, it is not binding and that was intentional because we were trying to provide a starting point for the market.  If we did something binding and hard, what we were afraid of is -- you know, a year from now the market may figure out, "Hey, it should be a little different and it could be better."  And we did not want this document to constrain them.  So, what this is a Best Practices Guide.  We are encouraging and we hope that the market participants will find it as a useful starting point.  If the investors and the issuers say, "No, there is a better idea," God bless them. Peter J. Wallison:  Okay.  And one more question in the back in the red.  Pat. Patricia Callahan:  Pat Callahan with the American Association of Small Property Owners.  We represent the consumer perspective.  And I was wondering how are you going to be addressing to preserve the integrity of the underlying asset?  It seems like the whole program that you had was good.  I mean, but it did not go far enough.  It really did not cause the modification -- loan modifications, I think, would have prevented a lot of the downslide.  What we were very pleased about was to see when FDIC took over one of the major banks, the first thing they did was send out massive loan logs.  And so anyway that was the problem I wanted to say was, what do you think you should do?  Because everyone seems to forget how do you then, when things are going a little bit soft, how do you probably bridge -- I do not want to say bridge long -- but bridge actions to make sure that the loan does not go completely sour? Neel Kashkari:  Sure.  Well, so that is -- what you raised is a very important issue that is not unique to covered bonds.  It is just, "How do we deal with the different mortgages and mortgage delinquencies?"  And that is -- if you think back to the first bullet on my first slide "Avoiding Preventable Foreclosures" where we have said -- and as we have analyzed it -- foreclosures are elevated, but we are trying to avoid the foreclosures that we can avoid.  If someone bought a house that they cannot possibly afford there is really no way to avoid that foreclosure unfortunately.  And it is sad, but it is kind of reality.  And so we have -- our approach has been to mobilize the entire industry in working with the counselors to get to homeowners, to get them to pick up the phone, do repayment plans or do modifications where there is a possibility -- you know where the homeowner is in the right house, but the wrong mortgage, we like to say, where you have the fundamental -- you have the willingness.  You want to keep your home and have the basic ability to do so.  And if you look at the data, I think it is over two million loans have been modified or repayment plan over the course of the past year.  We are on a pace of 200,000 a month.  And when I talk to counselors, the most important question I ask them, I say, "Look -- answer me this, are you seeing homeowners who want to keep their home and who, in your experience, have the basic financial capacity to do so?  Are they getting foreclosed on?"  And most of the time they say, "No."  There are cases where people are falling through the cracks, and we are working really hard to try to reach every single one.  We believe that most of the people who have the basic financial capability to keep their home are reaching out -- if they are reaching out, they are getting the help that they need, so that is not unique to covered bonds. Patricia Callahan:  Have you looked at the Ohio foreclosure redemption program which is done by Eugene -- Justice Moyer? Neel Kashkari:  We have -- I cannot speak to Ohio specifically.  We have surveyed all of the states at different times, and they all had different innovative programs, and we have incorporated some of the things we have learned from different states.  So, I cannot tell you about Ohio specifically.  Some of my colleagues back in the office I am sure have.  But, again, we want all ideas, and we have a necessary correction, and we are working our way through it.  Thank you very much.  I really appreciate -- Peter J. Wallison:  Thank you, Neel. Neel Kashkari:  -- your time.  [Applause]  Peter J. Wallison:  Okay.  Before I introduce the next speaker, I just want to note that we have a gap up here on the panel.  You have probably noticed this.  The FDIC's representative, Jason Cave, is not here.  But, there is another representative FDIC, David Wall.  David, can you identify yourself?  David -- David Wall:  [Inaudible] Peter J. Wallison:  -- would you take Jason's place? David Wall:  It is probably not possible to do that actually.  [Laughter] I can do that physically. Peter J. Wallison:  Thank you very much.  And he will be in turn in Jason's turn.  Jason could not make it. Our next speaker is Scott Garrett, Republican of New Jersey, who has represented New Jersey's fifth congressional district in the House of Representatives since 2002.  The reason Scott is here is because he is the originator of some legislation that would enable covered bonds.  And the question, I think, that is raised by the legislation and by what Scott is doing is whether you can have an effective covered bond system -- whether there will be confidence in the market about the structure of the system without legislation.  Scott's legislation is comprehensive and could be very helpful if adopted.  But, I thought is was very important that we get before all of you and before the audience elsewhere the question of whether we ought to do this by legislation or simply as it is now structured through FDIC regulation. Scott serves on the House Financial Services and Budget Committees and is a member of the Financial Services Subcommittees on Capital Markets, Insurance, and Government Sponsored Enterprises; Financial Institutions and Consumer Credit; and Housing and Community Opportunity.  He is one of the most innovative members of Congress, as this legislation suggests, and he has quite a bit of experience in legislating in financial matters because before coming to Congress, he was a member of the New Jersey General Assembly and was chairman there of the Banking and Insurance Committee.  There is more in his background that is in your folders, but let us give a warm welcome to Scott Garrett.  [Applause] Scott Garrett:  Good morning, and thank you for that introduction.  Good morning, everyone. Audience:  Good morning. Scott Garrett:  Wow.  Boy.  It is good to be here with you.  Thank you, Peter, for the opportunity.  That was -- I found Neel's presentation totally thorough and fascinating.  Now you have me.  [Laughter] But, thank you, and appreciate AEI for hosting this forum today because it is, I believe, an important and timely topic dealing with covered bonds. When I was invited to speak here, it was roughly, I guess, a little over a month ago.  And at that time, of course, the financial landscape in the country was markedly different than where we are right now.  Of course, since my invitation to come on over here, you have seen basically the nationalization of the GSEs, the takeover of AIG, of course, the merging with Merrill Lynch, and then, of course, you have Lehman Brothers at the end of that. We just has a press conference yesterday and Jeb Hensarling, my colleague, made comment of that as well and made note that out of all of those, I guess Lehman Brothers probably had the worst lobbyist up here on the Capitol Hill then considering how they all turned out.  Of all the problems that I see -- and I am worried most about what has happened over the month -- you know we see all that Bank of America did and right now they are Bank of America.  If things keep on going the way they are they may get the Hamiltonesque [phonetic].  They will be the bank of America, the only bank of America, [Laughter] the last lender out there.  Actually the lender of last resort right now is the Federal Reserve.  The federal government may actually end up being the only lender out there. The problem that we have right now with everything that is going on on the Hill, and at the Treasury, and in the White House is worrisome to me.  The Treasury bailout of the Federal Reserve -- you know things are getting bad when the agency of the Federal Reserve that is doing all of the bailouts has to be bailed out themselves by the Treasury.  There have been so many bailouts out there -- this is just a side note on the covered bonds issue -- they -- you -- there was somebody who tried to keep track of it, why we got here or how we got here -- just two days ago I dropped in a piece of legislation -- a separate piece of legislation -- to create what we call a House Select Committee on bailouts.  And the purpose of this -- this is a bipartisan piece of legislation that we dropped in and we already have 50 or so signatures on it and going upwards -- is to investigate the actions of -- in essence what brought us to this point over the years and then to try to give us a handle on what actions should be taken to prevent it in the future.  Hopefully, in the near future, we can overcome our current financial woes.  And if you saw the articles in the paper that near future may be only five days away -- or about six days away next Wednesday if Barney Frank has the hearing on the next bailout.  Today, although I would like to briefly discuss one of the ways we can possibly and that is, of course, covered bonds.  I will outline some of the positive aspects, I believe, that covered bonds can bring to the market, details of the covered bond legislation that I recently introduced, and why it is necessary on a statutory framework -- and appreciate your comments and questions as well -- and also I will close on the political landscape and how that may either promote or hinder the moving forward of any legislation in the House. To begin with, as I said -- and Peter the title of this conference is "Can Covered Bonds Compete with Fannie and Freddie?" -- the short answer to that is a definite maybe.  If the proper legislative framework is put in place allowing for a bond marketplace to fully truly flourish in the country, I do believe that covered bonds can offer an extremely valuable form of financing that could provide an alternative for a portion of the pie, if you will, to the current mortgage securitization model. However, we all know that Fannie and Freddie are now virtually impossible to compete with unless you have -- of course, you have the competition -- also has the explicit backing of the federal government and also they have millions, and millions, and millions of dollars of campaign contributions, and also charitable contributions, and also the ability to issue manipulated or zero financial statements and still be listed on the New York Stock Exchange.  [Laughter]  If all of those things happen then you have an even playing field.  I think it is important to note from the outset that while covered bonds can provide a useful alternative to Fannie and Freddie, I seriously do doubt that their ability to replace -- totally replace -- Fannie and Freddie.  In last Sunday's Washington Post there was an article and that article chronicled the history of congressional oversight -- or maybe the lack thereof -- dating back to the GSEs to 1992.  It mentions that former Banking Committee Chairman, Jim Leach, expressed concern that Congress was creating, at that time, a weak regulator and that the companies were changing from "being agencies of the public at-large to money machines for the stockholding few.  Leading the charge against such strong regulation, then as now, was none other than a current distinguished Financial Service Committee Chairman Barney Frank."  That article went on to describe in detail how time after time and again and again the two companies fought off increased regulations from a combination of well placed financial contributions, strong-arm lobbying tactics that have reached almost legendary status here in Capitol Hill.  Former Capital Chairman -- Markets Chairman, Richard Baker, noted, "The political arrogance exhibited in their heyday there has never been before or since a private entity that exerted that kind of political power."  And we saw, even in light of that, former Fannie CEO, Frank Raines, told investors in 1999, "We manage our political risk with the same intensity that we manage our credit and interest rate risk."  I am sure you have all ready recently as well over the last decade that Fannie and Freddie have spent over $170 million on lobbying on members of Congress.  At last count there was something like 142 lobbyists on retainer.  That is really a lot of people watching out for their interest -- their political interest -- and ensuring that they retain that preferred government status [sounds like].  Also, Fannie and Freddie have several different ways of passing vast sums along to their Congressional stalwarts.  Over the last 11 years, the executives of the companies have contributed over $16 million to members of the Congress by local action committees.  And the oft overlooked, but equally important Fannie and Freddie contribution, are their charitable contributions and they, of course, provide an additional avenue for members to receive millions in funds into their respective district. So, while their lobbying has currently been suspended due to the recent actions by the Federal Housing Agency, Jim Lockhart, I would suggest that you should not expect our friends there to be any less loud in the debate that will continue to rage over the coming months and years when Congress begins now to reexamine how to reshape or reconstitute these companies.  No entity as politically entrenched as Fannie and Freddie will ever simply just disappear overnight and therefore allow these other entities to be able to grow unencumbered. Unfortunately, it is likely the Treasury's recent actions will allow them to stay afloat while the Democrat controlled Congress plans its next move.  I already sent -- seen comments by Chairman Frank and Senate Majority Leader Reid saying that they feel that Fannie and Freddie serve a valuable mission and that they should simply be restructured in the same they were before in that business should continue as normal.  That despite the fact that we saw a little while ago in the paper, Freddie Mac's CEO -- former CEO, Richard Syron -- acknowledged the Herculean task of serving two masters in the current structure that they have, saying that balancing the dual task of serving the public while creating profits for investors makes that job almost impossible.  I also believe that too many members of Congress have pocketed too much money, quite frankly, from the GSEs to ever let them exist in another structure. So, I prefer the approach -- that is why I come here today -- that Mr. Wallison opined in The Wall Street Journal and Op-Ed just a week ago that GSEs should be put into a receivership.  I believe that then, if they were to be unwound, and broken into smaller entities, and privatized severing that link between the federal government and the institutions that would lead the way to strengthen our hand to be able to go forward in the covered bond situation. I had even scheduled, come to think of it, a meeting -- today is Friday -- I just got -- scheduled meeting.  It was yesterday -- Wednesday -- to this end actually with the White House because it -- as you know, the Treasury has moved to basically allow them to continue on as they are.  We had scheduled a meeting on Wednesday with the White House to basically say -- to try to convince them that they need to act now with regard to the GSEs and not put this off to the next administration and the next Congress.  Unfortunately, I guess, with AIG coming down the pike and what have you that meeting was canceled and -- I cannot say postponed because we have not heard back from the White House as a new date yet. So, historically, the backing of the government provided for Fannie and Freddie has provided and protected investors at the expense of taxpayers creating so called socialized losses and private profits.  And the goals of increasing low and moderate housing while laudable should be applauded, but it cannot be achieved while we are also trying to increase the wealth of the shareholders. So, to covered bonds.  To help restore our nation's mortgage market there is a need for additional liquidity, as already been indicated, and it is covered bonds is the way to go.  Covered bonds simply are one investment tools that can provide an alternative mortgage securitization.  As indicated already, it has been used in various formats and in Europe for centuries.  As Neel mentioned, covered bonds are debt instruments for high quality assets, and I will not go into detail since Neel gave you a thorough backing on that.  I do want to give pundit applauds to those people who have already stepped out on this and that, of course, first and foremost goes to Treasury Secretary Paulson, and also to Neel, and also to the FDIC Chairman Sheila Bear for all of the work that they have already done to date in essentially laying the groundwork out there for covered bonds in the marketplace.  Secretary Paulson recently noted covered bonds "is a way to increase the availability and lower the cost of mortgages in financing to accelerate the return to a normal market."  So, I think it serves them well that they have done this, and serves the American public well, and I can appreciate the fact that I have had opportunity to talk to all of them on this matter. Just as Neel said, and I was glad to hear it, that he said this was something difficult even for someone of his intellect to wrap his mind and -- around.  Likewise, even more so for myself.  This is a topic that I have just began to work with I guess six or seven months ago.  It was over six months ago.  I have been working now with stakeholders as well as other interested parties on this proposal that I will be laying out for you.  And it was in July of '01, I guess, that I introduced HR 6659.  It is called the Equal Treatment of Covered Bonds Act .  So, what I would like to do is just take a second and outline exactly what my legislation would accomplish, explain what the structure of the bill does in the manner, in a proposed, and an overview of why it is necessary briefly.  As I say, I began this process back in February, I guess it was, of this year in our office.  I was -- it was even before any of these others situations were occurring.  That is actually before Bear Stearns all came down in March and what have you.  Even then of course -- even before we saw the current lack of liquidity on nation's mortgage markets.  And being a conservative, it is hard sometimes to be in a position where you are not simply there saying, "Just let the free market prevail."  Sometimes you want to be a conservative and say, "Let us champion a particular program or cause and be out there in favor of something as to simply being opposed to everything out there."  So, being involved here with covered bonds gives us, as a conservative, an idea -- a road to do just that.  And contemplating how to craft the legislation to help facilitate such a marketplace, the market participants, financial experts, and I met and tried to come up with a way.  And after examining both the European models and some of the ideas that you were discussing as well, I finally decided on the course of action that we would take in this legislation. Instead of following, for example, the U.K. model, which is creating a detailed and expansive statutory framework.  Instead what we did was draft a bill that would make a number of smaller changes -- and I call them tweaks -- and amend the current law and do so simply in a way that would help to clear up several of the ambiguities and provide investors with certainty needed to convince them to participate in the U.S. covered bond market.  Legislation itself can be broken down into five parts, and I will run through them real quick.  First, it amends the Federal Deposit Act to provide the same treatment for covered bonds as for other qualified financial contracts.  Second, it defines a covered bond as a non-deposit recourse debt obligation of an insured depository institution.  Third, it allows for a minimum term of maturity for a covered bond of at least one year, and it does not set a maximum term for that bond.  Fourthly, it adds a clause ensuring that a bank failure will not impair the value of the covered bond.  Neel talked about that a little bit.  Finally, it provides for a joint rulemaking authority.  It goes to the Secretary of Treasury.  It goes to the Federal Reserve.  It goes to the Office of the Controller.  It goes to the OTS as well and, of course, to the FDIC. Now, why it is necessary?  Well, we have heard some of it already.  I decided that amending the Federal Deposit Insurance Act and putting covered bonds under qualified financial contracts, what you would do there would provide possible investors the certainty and the assurance needed to guarantee them that a covered bond marketplace would be fully utilized.  Other types of qualified financial contracts would include security contracts, commodity contracts, forward contracts, repurchase agreements, and swap agreements.  These type of agreements that I just listed typically receive special legal protection in the event of a bank failure.  So, this treatment will provide investors more certainty that if the issuer of a covered bond does not fail, it is more likely that the failure will be a -- well, basically a non-event in the eyes of the investor.  So, in defining a covered bond as a non-deposit recourse debt obligation of an insured depository institution, which the bill does, second point, the legislation basically codifies what the FDIC has already put in the rule.  But, this is important in clarifying that the investor has recourse on the specific assets or mortgage being used to secure the debt and statutorily.  The investor also has an unsecure claim on the issuing bank. One specific difference between my legislation and the FDIC Final Policy Statement is the provision regarding the term of maturity for the covered bond.  While the minimum term which is set at one year in both rule and legislation are the same, the FDIC caps the term of maturity for 30 years while this legislation does not place any limit at all.  I was pleased to see the fact that they changed their time after taking in all the comments and everything that they had.  Their original proposal was to have a term of 10 years and that was extended out to 30 years.  Our legislation would just go one step further.  But -- and the reason we go one step further is that with constant changing of the market conditions that we see here going on, I do not see the necessity, quite honestly, of putting a limit on what these institutions can do in the private market. Now another section of the bill seeks to make clear that a failure to the bank would be a non-event in the eyes of the investor.  The FDIC Policy Statement allows the FDIC to put a stay on for 10 days.  It originally was 90 days.  And during this time the value of the mortgage collateral would be -- could possibly be unfairly impacted -- negatively impacted.  That is why we put in 6659 specifies that if there is an appointment of a conservator or a receiver their direct compensation to the investor would be four points: the outstanding principal of the covered bond, all interest that has been accrued on the covered bond that has not been paid yet, and thirdly, the cost of any charges related to the establishment of the GIC, and fourthly the cost of any insured legal charges.  So, this provision in statute, in law, would ensure that the value covered bond is not negatively affected at all by the discretion actions of the FDIC. Next, the legislation also provides for joint rulemaking authority, as I pointed out, to all the different banking regulators: the FDIC, the Federal Reserve, the OTC, and the OTS, and the Department of the Treasury.  See, while the FDIC is the agencies that would be in charge of, obviously, the Deposit Insurance Fund, we thought that is important to have all the regulators at the table when making the rules, so the concerns and needs of each segment of the banking industry would be represented. Next, what -- why it is important to do this bill, and as a bill -- as a statute -- as opposed to regulation, let us look at this way.  While the FDIC put a great amount of work in the issuance and solicitation of comments from all corners of the financial sectors, I still believe that in certain ways the Policy Statement is too restrictive and prevents us from recognizing the full potential of a covered bond marketplace here in the United States.  For example, as Neel pointed out, the Final Policy Statement limits a covered bond aggregate to no more than four percent of the institution's total liabilities and, I believe, that is perhaps unnecessarily low and my legislation does not include a specific amount for the issuer.  Other U.S. bank regulators have expressed concern over this low limit as well.  Europe has a covered bond marketplace that is roughly $3 trillion in size and their limit is around 20 percent on the issuer's liabilities.  So, in order for a covered bond market to take off here, this number we thought should be increased. The FDIC also has very prescriptive -- prescriptions on the type of assets that can be included in the covered pool.  And I agree that the product should be the highest quality with all the proper underwriting.  However, I really do not see any reason to limit the -- to a very narrow sector such as the residential market.  For example, commercial mortgages are traditionally high quality assets that can provide an excellent source of possible collateral and could be used in a covered bond transaction as well.  And so because of this, I decided that we should not specify or limit the type of assets that can be on in a covered bond pool. So, now that I have given you a little brief explanation of the legislation structure, let me just give you a very brief talk on why it is necessary.  We have talked about this -- about the flow -- changes in the market and what have you and how the covered bonds are debt instruments, but the aspect of the -- putting it in legislation versus just doing it through the rulemaking process.  Most of the countries that use covered bonds as their basic premier tool and Europe do so by policies that are set in law.  Covered bonds or debt instruments are broad enough in scope and magnitude, we believe, to warrant, and authorize, and codify a federal statute.  The codification of this tool will provide the greater stability and permanency for the covered bond, in addition to encouraging the use of covered bonds as an alternative.  So, establishing a statute will provide for the benefit of legislator review as well, rather than the possibility of changing covered bond policy through simple motion of the FDIC Board of Governors.  I believe that some of the specifics should be left up to the agency.  Obviously, statutory language provides more certainty than the regulatory change and this certainty can also result in lower transaction costs, the cost -- investors will not be pricing for that uncertainty.  In addition, spreads will be narrower which will encourage more institutions to enter the covered bond marketplace and it is a goal to provide an environment in which the market will flourish and produce increased liquidity. Now, the Department of Treasury's Best Practices document highlights another benefit of a legislation framework.  It states that "a legislative framework helps the standardization covered bond market providing simplicity to the market.  This standardization will allow for a more efficient marketplace by ensuring that everyone is playing by the same rules." Finally, the political landscape -- that is the politician here today -- and looking through the legislation to facilitate a covered bond market, we have to examine the current political realities on Capitol Hill.  And let me give you my thoughts on that.  Because covered bonds are a relatively new way of financing in the U.S., and the marketplace is really just developing here, I have to tell you that many members -- most members of Congress have not yet focused on the specifics of it all.  Even many members of my colleagues on the Financial Servicing Committee have just begun to ask questions to figure out exactly how covered bonds would work.  But, I, always the optimist, believe that we should be able to move forward on this quickly.  And I think we are going to be able to do so in a bipartisan manner as well.  I have spoken to the Chairman and -- on this issue -- and Kanjorski as well, and also Spencer Bachus is a cosponsor of this legislation.  He has stated he supports -- strong support for going ahead with this.  And so by reaching across the aisle, I think we can move, if not in the next week, but maybe at the very beginning. As you know, we only have something like -- one, two, three, four, five -- five days left of this legislation calendar, so it may not happen this week; although, when I wrote this, I said it may not happen this week.  But, reading today that maybe this week, this Wednesday, we may be making the largest structural changes of investment by the private -- by the public sector in the new RTC2, who knows what we could potentially actually do.  We could just throw this covered bond legislation in along with the stimulus package and everything else that will go into the Wednesday legislation and see; we may have covered bond legislation by the end of next week, so it is really fortuitous that you are all here today [Laughter].  You are all on the cutting edge. So, again, I appreciate -- in conclusion, I just want to say that we all agree, I think, that covered bonds have a good track record in Europe and they offer an interesting alternative to the normal mortgage securitization process.  The statutory framework, I think, would be beneficial not to push the economy in this direction, but to provide that certainty -- that certainty that is not there in the rulemaking process.  Again, appreciate AEI for giving me this opportunity and this forum.  And I thank the panel here that I look forward to hearing the great advice and debate that follows.  Thanks a lot.  [Applause] Peter J. Wallison:  Okay, we will begin our panel discussion with Greg Baer.  We will actually be going right down the line from Greg all the way through Tim Skeet.  I will introduce them in order as they -- as their turn comes.  Greg is the deputy general counsel of Bank of America's bank regulatory and public policy legal group.  He is responsible there for providing legal advice and counsel regarding regulatory and legislative activities for the company. Before that, he was a partner in the Washington, D.C., law firm of WilmerHale, where he advised domestic and foreign financial institutions and represented clients before the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.  Many of your probably know that prior to joining WilmerHale, Greg was an assistant secretary for financial institutions at the Department of the Treasury where he coordinated Treasury policy on Gramm-Leach-Bliley and led the development of presidential initiatives on financial privacy and consumer protection.  We are happy to have you on our panel today, Greg, and happy to learn that you are involved in the covered bond issue.  So, why do not you get started? Greg Baer:  Thanks, Peter.  It is great to be here. I am going to try to give the issuer perspective today and then leave the rest of the panel to talk from other perspectives.  So, basically, what we believe -- why we believe covered bonds are in the interest of Bank of America, why we also believe it is in the interest of the market and ultimately homeowners, and then from the regulatory perspective what we see as sort of the past obstacles and how we have managed to clear them.  I was going to give a sort of broad overview of covered bonds.  I think Neel has done that admirably.  I guess I would only stress two things, which I think he stressed, but you just cannot repeat enough.  The first is I think the crucial distinction between covered bonds and mortgage-backed securities.  That is with mortgage-backed securities the investor is receiving a pass through of interest payments ultimately from homeowners with associated risks of default and prepayment.  With a covered bond -- if we issue a covered bond, investors are looking to Bank of America to pay on that bond.  The pool of mortgage assets is relevant only in the event of our insolvency.  And that pool of assets, though, is of extraordinarily high credit quality.  Again, as he noted, this is a dynamic pool of assets where mortgages that prepay or default are removed from the pool. As you add all that up, that reaches the second key thing to understand, which is that investors in covered bonds are a fundamentally different group of investors from investors in mortgage-backed securities.  They are covered by different desks at the investment banks, different analysts.  And potentially it opens up a whole new group of investors to fund mortgages in the United States.  I will leave more on that to Tim Skeet from the distinguished firm of Merrill Lynch, who will be talking about that later.  [Laughter] Tim Skeet:  [Inaudible] Greg Baer:  Every day. So, just starting with our perspective and why we like the covered bond option.  First and foremost, it is an ability to monetize mortgage assets on our balance sheet.  Right now, we already have $100 billion of unpledged mortgage assets that potentially could qualify for inclusion in the cover pool. They also with covered bonds give us an option of offering longer term debt.  Two, three year bonds, but in Europe it has gone ten, thirty year.  So, in terms -- if you think about trying to ladder a structure of liabilities to fund mortgages that this is a very useful tool. They are a nice complement to federal home loan bank advances, which we also use as a funding tool because they tend to be longer term and the haircuts tend to be a little lower.  And they are also a complement to securitization.  There is a clear tradeoff.  With covered bonds you keep the loans on balance sheet.  You have to hold capital in reserves against those.  But, on the other hand, you are not paying a guarantee fee.  So, depending on where the market goes on any given day or any given time, there will be a tradeoff of how much you want to use each, but we see them clearly as complementary.  Obviously, to the extent that the GSEs become smaller or less in the guarantee business, this is something that could complement that.  Those are the benefits for us. I think from a public policy point of view, there are also benefits.  Primarily it is the fact that these mortgages remain on our balance sheet, so that means in effect we have to eat our own cooking.  We have to incur the risks and have disciplined example, in the originate-to-distribute model perhaps. As I already explained, banks have to hold capital reserves against this which tends to yield a more stable source of lending.  And then also as we have seen recently, workouts can be difficult in the event that there are investors and servicers involved, but here since they are on our balance sheet we own them.  We have every right to work them out as we please. I think another sort of important benefit is that as a -- I think we were discussing earlier -- these tend to have been issued only by regulated insured depository institutions.  So, again, those mortgages are subject to examination supervision by our regulator.  They are also subject to CRA.  So, there are some incidental benefits there as well.  So, I mean, if you add it all up on a policy view, clearly covered bonds are not the answer to what ails our mortgage market, but they do seem to have important contributions in certain areas where we are experiencing problems. So, given all this -- we actually have already done four issuances of covered bonds, not this year, but the year before in, I think, late '06 -- three issuances in Europe, one in the United States, and saw it even then as an important tool. The problem though was -- again because of regulatory uncertainty -- this is a terrible mike -- because of regulatory uncertainty those -- that we had to structure those issuances in ways that were fairly inefficient.  And so we sought from FDIC, Treasury, and others some sort of regulatory clearing of the way that would allow us to use a more simple and easy to understand structure.  Both a less complicated structure, but also again because we are talking about rates investors, a structure that was readily understandable. Neel has already walked you through the FDIC Policy Statement -- I am sorry, the FDIC Rule, and we will hear more about that shortly.  I will just highlight the one or two things that we thought were most significant.  The first was the shortening of the automatic stay period from 90 days to 10 days.  Again because of the uncertainty in that 80-day period, we were required to establish a structure and also pay out on a swap agreement to insure that investors continued to receive payment during that period, and that really increased our cost.  So, ideally, as Congressman Garrett was saying, these would be qualified investment contracts and there would be a zero day, but we think 10 days is eminently workable and are very pleased that the FDIC took that step.  In fact, I should say I mean we were very pleased overall with the -- with both the speed and the thoroughness with which the FDIC devoted themself to this issue.  I think they clearly recognized this as an idea whose time has come, and they worked very well with, I think, all parties involved to make this happen. The second issue, which is extremely technical, and I will not get into, but I think the clarification around damages being par plus accrued interest was very important to us, and I think the market as a whole and that will definitely help facilitate bank issuance. And then there has been a lot of talk about the four percent limit that the FDIC imposed.  We think that is absolutely fine for now.  That is, I think, where the U.K. and some other countries started.  They have since increased it, and that would be fine.  But, I mean we do not think any bank should be doing all of its funding through any one mechanism.  Everyone should have an array of funding vehicles.  And so some limit on the amount you can fund yourself through covered bonds is perfectly appropriate. Just a word or two on the Treasury best practices, which are exactly that.  As I think someone noted, it is a little odd for the private sector to go into the government and ask them to specify the terms of their deals.  But, in this case -- I think the key word Neel kept repeating was homogeneity -- that we saw real benefit in trying to develop this market for everyone to be on this -- on largely the same terms. We actually had experience with this because the first issuer in the United States was actually WaMu.  And when we did our issuance, we replicated their structure not because we thought it was perfect and we could not improve upon it.  But, we really felt that it was important for investors to see one set of terms and be able to get comfortable with that.  So, again, we really appreciate the Treasury's actions here.  I think it has made a significant difference. The one remaining issue we are ironing out is just the mechanism around issuance.  To date, the market has been a private placement market under Rule 144A.  We believe for this to really grow it needs to be a wider public offering.  That will get us a broader investment base.  It also qualifies covered bonds for inclusion in the indices, so we think that is very important.  We also want to be able to issue directly out of the bank without having to use any special purpose vehicles or entities to do that.  We are currently in discussions with the SEC around Section -- what is it -- 3A2 exemption in order to try to facilitate that and hope that works out.  But, we feel all in all that there has been important and necessary work done to clear the way for a broad and liquid market here and are quite satisfied with where things are.  So, that actually brings us to the question of legislation.  And we very much appreciate the interest of the Congressman and everyone on the Hill in this budding market.  In terms of where we stand on that, I am going to descend to a clumsy and hokey analogy.  You know, we see covered bonds right now -- if you are coming up to the car dealership, we have got sort of the base model.  The engine work is great.  There is a roomy interior, and you can drive it off the lot.  Legislation is more than the sun roof and the eight speaker stereo system, which you do not want to really wait for the factory order on that.  So, what we want to do is going ahead and drive off.  Maybe we will get those installed later some time next year, but we are perfectly happy with what we have right now in terms of our ability to issue.  That is all I have. Peter J. Wallison:  Thank you very much, Greg.  Greg, this -- the idea of homogeneity is understandable certainly from the standpoint of trying to market something.  But, how do you react to the idea of it might stifle innovation and development about this field?  Are you suggesting that we should not have any innovation?  That we should establish one format for covered bonds and leave it that?  Or are you open and is Bank of America open to other systems? Greg Baer:  Yes, I think generally we are open to other systems.  But, I do think if you look at the European model, their legislation is actually quite prescriptive and has really facilitated the development of this market.  Again, I think it gets back to the second of my core points, which is when you are looking at an MBS or other sort of structured product there is a lot of analysis that goes into how does this structure work, where is the waterfall, who loses money, when, all of that.  And that is a whole group of analysts, investment bankers -- and I should let Tim hop in here at some point -- and investors.  What we want here is to appeal to rates investors who see basically an interest product with extraordinarily low credit risk and do not invest that kind of time in terms of investigating structure.  So, at least to start, we think it would be good to sort of parrot the European model where there is a homogeneous product.  But, Tim, I do not -- do you want to -- Tim Skeet:  Yes, let me just say that it is going to be challenging to try and get investors interested, which is what I am going to be talking about.  It is vital that we keep it as simple as possible in the early stages of development. The European market has become less homogeneous than it used to be.  We have seen a multiplicity of different structures and different arrangements.  It has become quite complicated.  And, again, a point I am going to touch upon is investors need to catch up with their ability to do the analysis and understand what it is they are buying.  That is a comment true not just at this asset class, it is a comment true of every asset class on the market right now. But, I think we feel quite strongly that in the early stages to get this thing launched, let us try and keep it simple.  Let us give them as little work as necessary to do so that we can get this thing out there and get some momentum behind it.  I think that is the critical first step that we have to take together. Peter J. Wallison:  And I assume you are not worried about the fact that Congress might come in then and legislate a different structure.  I mean I think the thing that would worry me about that is if you are trying to go on the basis of an FDIC regulation, it is not unimaginable that Congress would come in and say, "Well, we want it to be done a different way."  And all the work that you have done to get the investors interested in this subject and talking about a very simple structure would then be dissipated, no? Greg Baer:  I mean we have had -- we have talked to folks about legislation, and I have looked at some of the bills.  I think it is fair to say that the legislation that is being contemplated would not really represent a fundamental change to the structure that we envision the FDIC has laid out. There are -- the things that legislation would help on, just to get into specifics a little bit, are, for example, under the Bank Capital Rules legislated covered bond programs get a 10 percent risk rate for bank holders, non-legislated programs get a 20 percent risk rate.  So, just the fact of legislation itself, even if it did not say anything, would get you potentially from 20 to 10 so that is a clear thing. It -- the legislation could clear up some of the ambiguities around the securities' laws.  Again, that does not really change the structure -- very helpful.  And then there are, I think, a set of tax issues that I would not begin to describe.  The legislation could also talk to.  But, we would hope and expect that legislation would not really speak to the core structure in terms of this deal. Peter J. Wallison:  Okay, our next speaker, who is almost disappearing, is Bert Ely.  Bert is absolutely no stranger to this -- these panels at AEI, and he has been involved in many of ours involving a number of things and especially including GSEs -- government sponsored enterprises.  He is a financial institutions and monetary policy consultant.  The name of his firm is Ely & Company, and he specialized in deposit insurance and banking-structure issues since 1981.  I will not go into all his background.  I think everybody has heard from and knows of Bert's extraordinary work in this area.  So, I will just turn it over to Bert, and you can treat as though you are on say CNN.  Go right ahead. Bert Ely:  Good, thank you.  Very glad to be here with you today to talk about covered bond.  I am a covered bond bull.  No ands, ifs or -- at all about it -- and I am going to hopefully convey some of that sense to you today.  And what I see as tremendous potential for covered bonds in the United States, which I think is particularly important to be thinking about on this very day when we are seeing incredible tumult in the U.S. financial markets.  Let me -- that is why -- there we go -- let me back up a minute. Male Voice:  [Inaudible] Bert Ely:  No, no that is okay.  I can see it from here -- that, first of all, "Can Covered Bonds Compete with Fannie and Freddie?"  That is the question for the day.  And I say, "Yes, they can."  And I am going to talk about why that is. First of all, I am going to just run over very quickly again on what covered bonds are.  You have heard -- I have got just a slightly different take on them and so this will overlap a little bit.  I apologize for that.  But, first of all, they are on balance sheet following -- and this is a little diagram I have developed to try and illustrate this that they just -- they are assets on the balance sheet of the bank as are the bonds along with other assets, other liabilities such as deposits and equity capital.  Notice, I do not call this a bank.  Covered bond issuance can be just as easily done by non-banks as banks. Now, just some other points.  Covered bonds are long-term.  In some cases can be up to 50 years.  They, in my opinion, are ideal for funding 30-year mortgages.  Someone had the audacity to suggest in the letter to the editor in The Wall Street Journal a couple days ago to suggest they would not be.  I see no reason why they could not be used -- that we -- why we cannot maintain the 30-year fixed-rate in this country funding with covered bonds. The amount of assets in the cover pool must always exceed the covered bonds.  This is the key protection and at all times every covered bond asset meet -- must meet certain performance requirement.  If the bond -- if the mortgage, for instance, goes in default or goes 60 days past due then it has to be dropped out and replaced by another one.  And so this is what I call an evergreen requirement.  And this is what is key, in my opinion, to the fact that covered bonds are a highly rated -- usually AAA -- is because no matter how long they are outstanding, the issuer is obligated to constantly maintain the credit quality of the assets that are supporting the bond.  This is a key difference between covered bonds and asset-backed securities and, of course, you have got to have an independent asset monitor to make sure that is happening. Now, how do covered bonds differ from securitization?  Well, first of all, they are a non-balance sheet liability.  Securitization trust liabilities are off balance sheet; although, as Alex Pollock has told me many times, "There is no such thing as off balance sheet.  It is just on another balance sheet some place else."  The covered bond issuer retains all credit and maturity mismatch risk.  Securitization moves those risks off balance sheet, but out into the ether.  A lot of people have thought that that is the case.  I think we are learning in recent days that that is not the case.  Covered pool asset are subject to regulatory capital requirements which, in my opinion, are -- particularly the leverage ratio are excessive for low risk assets.  Market force has determined how much capital, implicit or explicit, backs the securitized asset.  In my opinion, securitization incurs greater transaction costs.  And I also believe that covered bonds have greater transparency than securitization. Now, what can covered bonds finance?  Well, we have talked about homes, but let me give a little data on this -- I am sorry the pie chart is not colored in.  I have not figured out how to do that yet -- but, this is -- we have in this country, including home equity debt, as of June 30, according to Fed figures, eleven and a quarter trillion dollars of mortgage debt in this country with GSE asset-backed securities holding 41 percent, the GSEs on balance sheet 4.1 percent, asset-backed pools, which includes a lot of the subprime private-label stuff, only 30 percent in banks and thrifts and credit unions, and then 7 percent elsewhere. This is a market that is dominated by the GSEs.  In my opinion, covered bonds will ultimately provide cheaper funding than what the GSEs can provide which is why, I believe, in a competitive horserace in the mortgage market covered bonds will become a very important, if not, the dominant force of funding simply because they are more efficient than -- excuse me -- than GSEs are.  Particularly in light of the restructuring that Fannie and Freddie are going to be going under until such time as they totally disappear and, of course, I would like to see them ultimately put out of business. Now, what else can covered bonds finance?  And I just list a whole bunch of these: departments, office buildings, automobiles, equipment, ships, airplanes, so basically almost any type of asset that you can put on a bank balance sheet.  Are we going to get there right away?  No.  But, I think that there -- that potential is there.  And so it is important -- picking up on a point that Peter made -- to think beyond just houses. Now, potential covered bond issuers -- broad range of issuers: depository institutions, bank and financial holding companies -- there is no reason why a bank or holding company could not issue it -- investment banking firms, all the usual types of financial firms, or basically any kind of business with discreet assets that can be put into a cover pool. Now, what are the cost advantages of covered bonds?  First of all, a simpler structure.  Now this is a -- one of many types of illustrations you will find of a securitization transaction.  This comes from various -- authoritative source -- some testimony Chairman Bair gave last year.  But, I have had -- I have seen diagrams like this for years.  And you do not have to read all the boxes.  All you see is you just have lots of boxes.  And you know what is associated with every one of those boxes?  Cost.  Somebody in the middle is making money and this gets to the fundamental transactional inefficiency of covered bonds.  Now -- Male Voice:  Of securitization. Bert Ely:  -- of securitization.  Pardon me.  Thank you -- of securitization.  Now, again, the question is, which is a simpler structure and, therefore, a lower cost structure?  I would argue that it is the bank as an issuer of covered bonds and using those funds to lend. Now, what are some of the other cost advantages?  First of all, fewer parties in the transaction.  Now I realize there is a downside, particularly for Manhattan, reduced income for bankers, lawyers, rating agencies, and on, and on, and on.  Reduced hedging cost because covered bonds have quite long maturities.  They are not going to be perfectly matched particularly because of prepayment issues, but you get a substantial reduction.  And as we are seeing in recent days, the issue of maturity mismatching, I think, is going to become more and more of a public policy concern.  Covered bonds represent a way to address that. Reduced credit costs due to the lender managing the credit.  We have not seen this filter totally through the system yet.  But, what we have seen with securitization because of the moral hazard associated with the securitization process, credit losses are turning out to be far more severe than anybody thought.  That is going to filter back through the securitization process.  We already see that with the higher guarantee fees that Fannie and Freddie are charging. Now, why do they reduce -- why do covered bonds reduce moral hazard?  First of all, the credit risk stays with the lender.  The leader -- the lender is going to be much more sensitive to credit risk if it cannot pass that risk to others.  Securitization diffuses credit risk which makes it harder for successor parties -- those further down the chain -- in the risk chain -- to assess that risk. And I developed this little diagram to pose this question that one mortgage -- you know take a look at those mortgages over on the left, and you go through securitization, collaterals, CDOs, CDO squares.  How can the investors over here on the right side understand or assess the credit risk over on the left?  And I might add that at a OTS conference a year ago December, Lou Rinary [phonetic] made -- is was one of the grand -- one of the fathers of mortgage-backed securities made essentially this point. Now, other things -- much less dependency on rating agency because of the simplified structure.  One of the real problems we have is we have not figured out what -- how to fix the rating agency problem.  I would argue for making them liable for their rating errors.  But, I would also argue that the agencies would be able to more easily rate the covered bond structure than they can a securitization structure.  And a final point picking up on something that Greg mentioned, and that is when you do not securitize a mortgage and it comes time to do something with it, to modify it or whatever, as we are facing now, a lot easier to do it if the lender has kept it. Now, the FDIC has some concerns about covered bonds.  I think they are, quite frankly, way overstated.  They do have a legitimate concern that covered bonds -- or really any kind of secured borrowing -- increases the percentage of loss to deposits and other unsecured liabilities in a bank failure.  And included in your packet is a comment letter I filed to the FDIC on this subject because -- and what is important are the numbers that I developed on it -- that if the FDIC would address this issue through risk sensitive premiums, they would address all of the concerns that they have.  And what I find in running the numbers for strong banks -- and most still are -- the increased premium would be a small fraction of one basis point.  And you will find my calculations attached to the comment letter. Now, when the bank's condition deteriorates, the premium rate should go up significantly so.  But, up to now anyway, the FDIC has not charged bank by bank risk sensitive premiums for the riskier banks.  That is banks that are classified as categories two, three, and four.  Now, a little birdie told me that may change some time in the coming months.  In those cases, for the riskier banks, the premium ought to go up significantly if they have a substantial dependency on any kind of secured financing whether it is federal home loan bank advances or covered bonds.  But, for sound banks, the premium differential is essentially nil. Now, in watching covered bonds, a key bias against it, in my opinion, from a regulatory standpoint, is the leverage capital ratio requirement on banks and thrifts because it discourages holding low risk assets.  A point that has been made before, you have got to develop the standardized covered bond documentation.  As to terms and condition, again it comes back to the issue of homogeneity.  Developing the investor appetite, which I know Tim will talk about, the key is to get a secondary market developed so that you can have -- so that investors in covered bonds can sell just like they can sell Treasury debt or MBS today.  And then I think a covered bond statute would be desirable. Now -- and I am getting close to the end here, Peter -- covered bonds can compete against Fannie and Freddie.  Fannie and Freddie are not going to gain all their pre-conservatorship competitor advantages.  Humpty Dumpty is not going to get glued back together.  The genie is not going to be put back in the bottle, and I think they are going to end up with a higher cost structure. In a well developed covered bond market, as I understand it from Europe, the spreads of covered bonds over Treasury should evolve to the point where they might be roughly where Fannie's and Freddie's spreads are over Treasuries.  Covered bonds will enable banks to avoid the cost of having to sell mortgages to Fannie and Freddie.  That is not a costless process.  They will also give banks and thrifts greater flexibility in mortgage design and modification. So, with that, I thank you, and I look forward to questions and discussion at the appropriate time.  Thank you. Peter J. Wallison:  Thanks very much, Bert.  Actually your points about the tremendous number of players in the securitization process is really quite important, and very important, I think, for how quickly this whole idea is disseminated and adopted, because a lot of people will not be making as much money, if you will, from the covered bond program as they would from -- and do -- from the securitization system. Have you done any work on the difference in costs -- what kinds of costs would be taken out of the system, because the only thing that will drive covered bonds is lower mortgage rates?  Bert Ely:  I have not -- I have looked at some aspects of it, particularly the capital cost burden that low risk assets carry under the leverage ratio, which unfortunately is in law.  I have not picked it apart yet too much in terms of the other transaction costs.  But, all I know is, when those little boxes drop out, costs drop with them, because I have had investment bankers only half-jokingly tell me, every time I show that particular diagram -- number one, like it.  They will come up to you laughing and say, you know, "Our objective is to stick another boxes in there so we can get some fee out of it."  So, it certainly is going to take cost out particularly once the ball gets rolling.  Early -- in the early days when the issuance is small, when there is not much trading volume in the secondary market, spreads are going to be wide -- that is not going to be the case -- but I think there is potentially a -- at least a trillion dollar market here.  That is only 10 percent of U.S. mortgage that -- excuse me -- 10 percent of U.S. residential mortgage debt.  So, we have a -- because of the sheer size of our economy and the amount of debt outstanding there is a tremendous market potential out there which will bring efficiencies as it gets going. Peter J. Wallison:  I should mention that in the Danish system when the bonds are issued -- which is something like a covered bond system -- and when the bonds are issued in the Danish system they -- the mortgage bank that issues them, or the credit institution that issues them, gets a fee over the interest rate, whatever it is, and that fee is competitive.  That is, the banks that are offering these things compete with one another to keep the fee as low as possible.  So, that is one way that compensation can come into this system, but it is going to be much lower than the securitization system we are using today. Okay, now I have the delightful pleasure of introducing my colleague at AEI, Alex Pollock.  He has been a resident fellow and colleague of mine, specifically in the work we do together, since 2004.  He focuses on financial policy issues, including GSEs, retirement finance, housing finance, corporate governance, and accounting standards.  He has written extensively on the housing bubble bust and is the author of The Pollock Plan for a one-page mortgage disclosure proposal.  Very popular in Congress, I might add.  Previously, he spent thirty-five years in banking, including twelve years as president and chief executive officer of the Federal Home Loan Bank of Chicago. Alex, the floor is yours. Alex Pollock:  Thank you, Peter.  As I have participated in international considerations of housing finance and looked around the world at the different kinds of housing finance systems there are, it really comes down to the fact that there are two fundamental forums of housing finance.  There are deposit-based systems and there are bond-based systems to finance the mortgages.  What it is clear is that if you insist on a deposit-base then you have to have variable rate mortgages or it will not work.  And if you want fixed-rate mortgages or long-term fixed-rate mortgages, you have to have a bond-based system.  Now, obviously, these two can coexist as they do in the United States. In our own country, the bond-based system has been dominated by Fannie Mae and Freddie Mac now in conservatorship.  We had a private bond-based securitization system, which is now moribund.  When we used to go to international conferences about different kinds of finance systems, the American presenters usually advised all of the international members of the audience that what they ought to do is copy the U.S. system and create their own versions of Fannie Mae or Freddie Mac.  And now, we are having the interesting experience of suggesting that we might want to look at a covered bond system, as people have said, that has existed for a long time in Europe.  The Germans claim it goes back to Frederick the Great.  The Danes claim it goes back to the need to rebuild Copenhagen after it burned down in the 1790s.  But, it is a -- it is an alternative bond-based system. It is particularly relevant because of what -- I think of the two paradoxes, at the moment, of Fannie Mae and Freddie Mac.  The first is, as the mortgage market got in more and more trouble, and they got in more and more financial trouble, their market share dramatically increased and they became more and more dominant in the overall housing finance system.  And as that happened, their market power -- their pricing power -- also increased and they dramatically raised their guarantee fees and added delivery fees.  So, we had this odd situation that as they were more and more troubled, they got more and more powerful and important.  And so the notion of developing alternatives to that duopoly and conservatorship are especially relevant now; although, they have always been relevant. Now, a key lesson that everybody has learned from our current mortgage problems is that it is exceptionally advantageous to keep meaningful participation in the credit risk of mortgages -- or of any asset, but of mortgages in this case -- with the lender that is actually making the credit decision.  Everybody now has figured this out.  If you just keep the mortgage on the balance sheet of a bank, of course, you have that continuing credit risk.  But, how do you combine that with creating a bond-based long-term financing which you want to manage interest rate risk.  And of course liquidity with the eternal banking issue -- that Bert so rightly mentioned -- of the danger of financing long-term liquid claims with short-term debt.  So, how do you combine the two goals of making sure that the lender maintains a permanent credit interest in the loan, and you also have ready access to long-term bond market financing?  That is the project, and covered bonds are one way to do this and an alternative, in my view, very much to be developed as we can -- as many other speakers have said -- an additional option for housing finance. But, what would it take to get this done?  And, in my view -- and here I will disagree with the Treasury Department and perhaps with the Bank of America as well -- in my view in order for covered bonds to work in the long term, they have to have a legislative base just as Congressman Garrett has suggested -- and, of course, it is great that he has introduced his bill -- and this legislative base is to protect -- indubitably protect -- the rights of the bond holders to the collateral from the deposit guarantor, the FDIC. In my view, the amount of discretion in the event of the failure of a covered bond issuing institution, which should be granted to the FDIC, is precisely none whatsoever.  The legislation should clearly give the bondholders of covered bonds the indubitable right to the collateral and a regulatory policy is not enough. In the first place, of course, the regulation can be changed by the regulator itself at another date.  And especially we have to notice here just the fact, as has been pointed out, that the -- that a deposit insurer -- not just the FDIC.  Any deposit insurer -- has a self interest exactly opposed to the interest of the bondholders because it is a competitor for the assets of the failed estate.  So, you are putting -- if you just leave it in the hands of a regulatory policy, you are putting the policy in the hands of someone who by nature has interests opposite to those of the bondholders. So, I believe a European style legislative basis is needed and has been pointed out.  This is the conclusion that most countries have come to who have wanted to encourage the development of covered bonds.  And there are a dozen or 20 countries over the last decade, which have adopted legislation with this in mind. Now, I am trying to think about this from the point of view of the FDIC and how might it consider this.  It does seem reasonable to me to think if there are high quality assets, which can generate covered bonds they are, in a sense, generating their own funding as opposed to being dependent on the government guarantee expressed through the FDIC of deposits.  And this is true as long as the overcollateralization of the -- what is called the cover pool -- and in covered bonds the mortgages that are put up as collateral -- as long as that overcollateralization ratio is less than or equal to the capital ratio of the organization issuing the bonds then it is the capital that is providing the overcollateralization.  And I do not think the FDIC should feel bad about that. However, you do have to say that if the overcollateralization is significantly greater than the capital ratio of the issuer then, in fact, its deposits, which are providing the funding for the overcollateralization and, in effect, the government guarantee expressed through the FDIC, which is providing the overcollateralization, and then you do have something more worth thinking about.  So, this degree of overcollateralization and the underlying source in the financial structure of the issuer is, it seems to me, a very important issue -- a very important question to think about. Now, in terms of cost, it is not clear to me that covered bonds will beat financing from GSEs.  Let us say from Fannie and Freddie because that is, of course, a subsidized financing course.  And we are trying to create a private market combination of the lender retaining the credit risk and getting bond market financing.  And it is competing with this, obviously, as we all know, government subsidized alternative, which may offset the sorts of complexity cost that Bert was discussing.  Still we ought to try it and see how it works out.  Moreover, we can say the more Fannie Mae and Freddie Mac make use of their market power to increase their guarantee fees and their delivery fees, the more competitive, by definition, the covered bond alternative becomes and that is a very good reason to have them in and of itself. Now, more directly competitive to covered bonds than Fannie Mae and Freddie Mac are, in fact, federal home loan bank advances.  In -- correctly viewed, federal home loan bank advances functionally are covered bonds.  You have a collateral -- an overcollateralized pool.  It has to be topped up in this dynamic way.  You have a bond-based financing.  The asset stays on the balance sheet and, therefore, the credit risk with the lender.  But, you just have an additional party inserted into the middle, namely the GSE, in the form of the federal home loan bank and, therefore, you have a layer of government subsidy inserted into the middle.  So, one of the key questions in mortgage bonds is what is the competitive dynamic between a covered bond, as we are discussing, and a functionally covered bond done through the home loan banks with the layer of government subsidy provided to the home loan banks in the middle?  Well, there again, my answer is we ought to try it, and see how it works, and how the market shakes out. In favor of covered bonds is that home loan bank advances do take extremely large overcollateralization.  There is no doubt, in all home loan bank cases, a good -- because home loan bank collateral haircuts are so large -- it is the very reason they never lose money on advances is because their overcollateralization is so big.  So, where is that overcollateralization coming from?  It is coming from insured deposits. So, there is no case -- there is no question that in the home loan bank functional covered bond case the -- you are financing the safety of the home loan bank advance through the FDIC's guarantee of the deposits and, therefore, I do think there is more to be said for the FDIC point of view on how that is cutting into their claim on assets in a potential failed financial institution estate than in the case of covered bonds.  And we will have to see how this competition works out. So, to sum all this up, and to say this again, we have two fundamental principles, which I think are indubitable.  One is that a lender with a permanent credit interest in the loans will produce higher credit quality loans than lenders who do not keep a credit interest in their loans.  Now, actually we have already done this experiment, and we already know the results.  Eleven years ago, in the home loan banks, we created the mortgage partnership finance program in which lenders do -- did and do keep permanent credit interest in their loans, and we know the result.  The credit performance is better than excellent of these portfolios.  These programs generated a good bit of argument, which I greatly enjoyed at the time, but no one -- there is no argument -- no argument -- about the credit outcome.  The credit outcome has settled the argument.  If lenders keep their interest in the loan, you get better results as you would think just from a priori principles.  And the second indubitable principle is that if we want long-term fixed-rate mortgages -- and we do want long-term fixed-rate mortgages -- then you must have an efficient bond market -- not deposit -- bond market-based financing.  So, we want to combine these two features -- and we ought to be working on covered bonds as one good and promising way to combine these features and working on other possibilities that we will -- should try to be imagining and promoting as well -- as alternatives to this old, but still dominant, Fannie Mae and Freddie Mac duopoly, as I said, now in conservatorship.  Thank you. Peter J. Wallison:  Alex thanks very much.  Let me ask you a question because you talked about needing a legislative basis because of the obvious conflict between the interest of the FDIC's deposit insurer and the investors in the bonds.  Should we be looking for non-deposit institutions?  And can they, in your judgment, function as effective competitors with depository institutions or with Fannie and Freddie? Alex Pollock:  I think it is possible.  It seems to me pragmatically that the people we are really talking about doing this are depositories at least in the beginning.  In the continental European cases, especially the German case, which I am familiar with -- you have to be chartered as a covered bond issuer; although, you are not -- and they are usually associated with depositories though not necessarily the depository itself.  So, I think it is a long run possibility, but a short run practicality as we are talking about organizations -- if it is not -- well it would probably be the bank itself, but at least would -- is in some kind of a bank organization.  I should say, by the way, we talked before about the prescriptive nature.  I have read, in translation, the German mortgage bond law.  They call them their Pfandbrief.  And it is extremely complex, as you might expect -- if you think about the culture -- Peter J. Wallison:  They are thorough, very thorough. Alex Pollock:  -- very prescriptive, very thorough, very long, and very detailed; although, I will have to say it is not as long as a typical Financial Accounting Standards Board standard.  [Laughter] Peter J. Wallison:  Danke Sch�n.  [Laughter] Okay, Tim Skeet.  [Laughter] Tim is the managing director of Merrill Lynch's covered bond practice -- now Bank of America's covered bond practices too.  Mr. --   Tim Skeet:  Subject to regulatory approval. [Laughter] Peter J. Wallison:  He specialized as a financial institutions capital markets banker for most of his career.  And prior to joining Merrill in 2006, he helped ABN AMRO build up their leading covered bond franchise in Europe.  He was involved in the early development of the residential asset-backed securities markets in the U.K. and later in the early developments in the German Jumbo Pfandbrief markets. He was a founder-member of the European Covered Bond Council and has been an adviser to the U.K. Financial Services Authority and Treasury.  Tim, your floor. Tim Skeet:  Well, thank you very much.  Recht sch�nen Dank!  I think because we do have a little bit of history to refer to and a little bit of background, [foreign language].  [Laughter] [Foreign language], so just to make a point [Laughter] -- Peter J. Wallison:  When I was in Germany, Tim, I got along with one sentence -- Tim Skeet:  So, I did not mean what I say. [Laughter] Peter J. Wallison:  -- and that sentence was, "Sprechen Sie Englisch, Peter?"  [Laughter] Tim Skeet:  Sorry.  Do we speak English here?  [Laughter] Some of you may have gathered my native tongue is sort of English.  I thought I would invoke the spirit of Frederick the Great since he has been mentioned here -- and, in fact, for the historians, Freddie or "Fritz the Magnificent" in Prussia came up with this before Copenhagen burnt down for the second time, by the way, when they came up with the idea of doing their covered bonds.  And another little aside on the Danes, you will notice -- or those of you who have studied this will be interested to note that there is a nation that has very closely followed the Danish developments.  In fact, they are just South of the border here -- because the Mexicans have adopted the Danish system.  So, of course, we here could, of course, follow the Mexican example rather than talk about Denmark. Now, I am, as has been pointed out, representing I guess the very distinguished firm of Merrill Lynch.  I guess I am undergoing a little bit of an identity crisis not just linguistically.  I think there was a small item of news subject to regulatory requirements on Monday which, of course, has made our lives even more interesting.  So, I am being particularly polite to my client down there the end here.  [Laughter] Hello. Now, I am feeling, I must say, very out of place in this distinguished gathering.  I am not a government official.  I never have been.  I am not a lobbyist.  I am not a politician, and I am certainly not a lawyer.  I am just a very humble banker, and I guess that is possibly not a very popular breed at the -- at this particular point in time. But, I am here because it is going to be down to me and few like myself to get out and turn this policy, this idea, this project into some sort of a reality.  And I think I am here to share with you some of the practical challenges and some of the thoughts that we are having to take it away from this panel of the great, the good, the distinguished, and then myself, and get out there in the highways and byways to see how we actually sell covered bonds in the U.S. The whole covered bond project is not entirely new to the U.S. since we did start -- and Bank of America has alluded to this -- we did start the process of introducing the instrument out of Europe into the U.S. in late 2006 in a meaningful way, but actually since the mid '90s when the first Germans came around and started trying to sell it when the Jumbo first emerged.  And I am not going to go into that bit of history, but we have been trying for some time to interest the U.S. investor in this project and, frankly, there was not a lot of interest prior to this.  There was not -- it was not an instrument that sat easily amidst the great panoply of products already available in the U.S.  But, I have to say, I am immensely excited by this and was delighted to be able to work with Neel and others on this project. And let me answer one point that was made earlier is, is there something unfortunate or undesirable about having a government show leadership or a department show leadership?  I think I would only say that there are times, and times such as today, when the markets are not functioning as they perhaps ought to, when it is useful to have a forum created for discussion with a little bit of encouragement, a little bit of direction, to help us focus our thoughts and to energize people into taking the necessary action.  And surely there cannot be anything wrong with that. So, I think, broadly speaking, we must all welcome the fact that we have got to where we are from a meeting in mid-June, which was the first discussion here in Washington around the project, to the end of July when Hank Paulson, and his team, and various other people made the very comprehensive battery of statements that actually put this whole covered bond idea almost on the road. I think it is worth also pointing out that this is not just something happening in the U.S., and it is not just U.S. authorities that take an interest.  It is happening worldwide.  I mentioned Mexico.  There are developments in Japan, in Korea.  We have had a lot of changes also in terms of the United Kingdom where over the past year or so we have adopted specific legislation having started without it.  Legislation is going in place -- is being put in place in Holland as we speak.  And there are various other jurisdictions including Germany, who are modifying their Pfandbrief Gesetz [phonetic] for the umpteenth time.  The Germans enjoy passing legislation.  [Laughter] They take great pleasure.  Anyone who has ever read a German book will testify to the fact it takes a longer time to get from the beginning to the end.  It is a very satisfying experience.  [Laughter] But, it is not a static instrument.  It is something that does grow and develop.  It is something that we expect to grow and develop.  I think what we did say earlier on is, "Let us try and keep it simple."  Because the biggest challenge we have -- not agreeing what is a covered bond, not trying to define it, is trying to sell it.  And I have a very practical disposition here because we know already that it is the investor who holds the secret to the future of this project, and nobody in this room, or nobody in this city if we have investors and if they are prepared to pay up for this because they believe in the instrument then we have the makings of a market.  And that is precisely why when all of the various parts were put in place, as announced on the 28th of July -- perhaps one of the most important parts was the creation of this U.S. Covered Bond Traders Committee -- because when we tried to get the instrument going 2006, 2007, we brought various Europeans over to the U.S. market and, indeed, Bank of America themselves took the step of issuing domestically.  One of the criticisms at that stage was there was not enough liquidity --  not enough trading to give the instrument the wings that it needed. I think it is worth saying that being a pragmatic banker and a banker who, unlike the ones that Bert has been speaking to a lot, is keen -- as keen as he is to kick out the boxes and to keep things simple and to reduce costs -- I think we do not, at this juncture, necessarily have to have a legal framework given what we are trying to do.  And I think the -- I think we need to step back and ask ourselves, "What is it we are trying to do?"  We are trying to sell a U.S. product to a U.S. investor base primarily. We did try selling the U.S. product to a European investor-base and the precedence we talked about and have alluded to were transactions designed to be sold to a European investor-base.  But, the European investors, broadly speaking, find it difficult to fully understand the nature of the U.S. product, U.S. insolvency practices, U.S. traditions.  And I am not sure even the U.S. understands insolvency practices, [Laughter] and there is a lot of debate about that. But, I think what we are trying to do right now is take this debate from creating a product for the Europeans, who do like their laws, and particularly the Germans who dominate the investor-base over there, and focus something which is pragmatic, and practical, and works here in the United States.  And the question is do we really need a law at this juncture to make the sale?  And the answer is, "Not necessarily." One of the first things I have to say though, and it is a key message which I put into every speech, is this is not asset-backed securitization.  We are not talking about ABS.  We are talking about covered bonds.  We still find in our contact with investors that there is an immense amount of confusion between what they are familiar with -- ABS, asset-backs -- and what we are proposing here, which is an on balance sheet, secured, but senior funding instrument for banks.  I think I emphasize that every time I speak about this product.  That confusion will endure because it is natural for investors to refer back to what they have seen, what they have invested in, what their current colleague down the corridor has invested in, and we have to make clear that they know what it is that they are buying.  In Europe the tradition is that there are various different types of underlying asset.  We have limited ourselves here in the U.S.  Again, let us keep it simple to start with.  Let us see how we can evolve this product.  And I think it is clear that the evolution of the product will be down to the bankers and the issuers.  And we can look forward, once we have it established, to a rapid and healthy evolution and development. As I mentioned, a key element will be, in the meantime, explaining the product, developing the product, and trying to create some kind of liquidity, some kind of supply.  Let me just say a word about that because many people asking questions about this product -- a lot of people are skeptical -- the idea of introducing a new instrument into the U.S.  What does the U.S. got to learn from Germany?  Why does the U.S. need a new instrument?  I think even without getting into that debate, the principle is that we are bringing something somewhat different.  They have seen it before, but they may not have spent time on it.  But, we are now asking people to pay attention to take time in these -- this troubled period to analyze something.  And that is a big ask, and that is why we thank the Treasury for giving us their support in terms of that big ask.  People will need to spend time on this if we are going to be successful.  And that time will be time rewarded and ultimately, the optimist that I am, I think there is a good future for this product. But, we do need to establish that liquidity.  We do need to have a certain level of issuance.  And I do not think the existing number of issuers available will be able to issue quite enough to get to the liquidity we would like to see initially.  Again, we cannot speculate as to where markets are going, and I will not even try.  But, obviously, we can provide domestic supply.  And, at some stage, I am sure very high quality Europeans would also like to return to the U.S. market once the investors have been convinced of the merits of this product.  And that in something that we should look forward to and welcome as an incremental addition to the liquidity to the supply. And a word on trading, the tradability of an instrument is important.  The statement that came out in the early stage and part of the Policy Statements was by its very nature somewhat vague, but it was meaningful.  In Europe, we have also struggled to define trading.  In fact, every single market in every single asset class we have defined in -- we have been struggling to define trading.  Trading has become extremely difficult. Last week, I was in Berlin -- sorry, in Frankfurt rather than Berlin -- but we were hosted by the German Pfandbrief Association.  They attempted to reestablish the German style of market making in support of the Pfandbrief.  And it was not as successful as the would have hoped simply because even the German investors and the German market have found these troubled times, these dislocations, difficult to form a consensus over pricing and over spreads and, therefore, we must wait for better times.  But, it is absolutely right that we take this opportunity to plan for the future.  There is a future, and we will be out of this morass, no doubt, faster than we think.  And it is absolutely right that we put in place the necessary steps, the building blocks, for what we are trying to do. We have had a number of questions arise also this morning -- I am trying to touch upon some of these things.  The rating agencies, all three of them, have slightly different policies.  Those policies are evolving.  I think it has been pointed out that they do look at the banks, and they do look at the pools.  So, they rate both parts in different proportions.  There has been a lot of rating action.  One of the things we will need to do is obviously try and get them to work with us to give investors certainty and to give them -- give us the high quality treatment that these instruments absolutely deserve.  And we will be looking forward to those discussions, but we welcome all input and all thought. Another element that is very important going forward is the provision of high quality research and insight into this product, which is no longer purely the rates product that it once might have been.  There is a high component of credit.  So, I think what we are looking to do is put in place the kind of combined credit work with the pool work with the rates work, which is absolutely necessary. Then just quickly also perhaps conclude my comments by talking about what we are practically doing to move the project off the starting block.  We have an initial meeting of the traders in the next short period -- in the next few weeks.  There will be some preliminary discussions going on about the creation of a U.S. Covered Bond Council to bring together the interests of all relevant parties to give us a forum for technical discussion so that we can iron out any of the issues which are arising as we create this market.  But, there is a willingness on the part of industry.  There is a consensus emerging.  We would like this project to succeed.  As I say, I am here to try and make it succeed with various of my colleagues across the industry.  Thanks for your time. Peter J. Wallison:  Thank you very much, Tim.  Let me just ask just one quick question.  And that is, you are concerned a lot about liquidity, but this is a bond.  And there are a large number of bonds that are issued and in the market without any particular liquidity.  There are some, but limited.  So, why is that such a major concern? Tim Skeet:  I think what we are trying to do is give an instrument to investors which requires as little credit work as is necessary and gives people certainty that there is a way to buy and sell with minimum cost and maximum efficiency.  Now that is the nature of a rates product.  I do not think what we can honestly given everything that has happened in the market that we will succeed overnight in recreating a rates style product, but that should be our ambition.  It is what we would like to try and achieve to pull this instrument back towards a rates style buyer.  And what that means is appealing to specific pockets of demand, which do exist across the U.S. market, which will then bring down the transaction costs very substantially. Now, that is the objective and we are going to work out ways of getting there, but that is why liquidity is something we need to provide and we need to give investors comfort over right up front.  And hopefully as the years pass by, and who knows what the timeframe is, but that will stand us in good stead. Peter J. Wallison:  Okay, now we have kept David Wall for last because he is substituting for Jason Cave, who would have been here from the FDIC.  And, of course, the FDIC is one of the most significant players in this whole thing as we have learned during this conference. David is a senior counselor in the legal division at the FDIC.  And we are very grateful to him for standing in for Jason at the very last minute.  So, David, go ahead. David Wall:  Thanks.  You know, I think I will make some very brief remarks.  And I did have some limited staff involvement in the development of the Policy Statement.  But, as is typical of a government representative, what I am saying here is my own view and does not represent the -- necessarily the view of the agency or certainly not an opinion of the legal division. But, with that caveat, I think that Neel did a very good job of giving a summary and outline of the Policy Statement, and I will not go through that.  They are -- in our issuance, there was some discussion of the comments that were received and the reasoning behind the -- some of our responses to the comments.  I think maybe what I will -- what I would like to say is that the Policy Statement really did represent a response to potential issuers like Greg and others who came to us early on and asked questions about our potential treatment of these instruments in the event of insolvency and particularly in view of the -- what is called the Stay Provision the -- that 90-day period that exists under our statute for a stay of contractual remedies when a -- when an issuer goes into receivership -- seem to complicate the potential for this market.  And we entered into a dialogue that took various forms.  But, of course, we had an interim statement which was then -- we received comments from many [Laughter] individuals and very cogent ones, and ones that we considered very carefully and came up with our Final Policy Statement.  And our role in this, at this point, I think is best expressed by some of the statements in the Final Policy Statement, which says we think we have provided a basis that meets the needs -- the express needs -- of the market at least insofar as it relates to the FDIC's mandate.  And we are eager to see how it develops from there. Obviously, the piece of the whole puzzle that was put in place by the Treasury Department is much broader and addresses many other issues that are not part of our -- the FDIC's particular brief, as it were.  But, I can say that it is always nice as a federal employee to hear somebody actually use the word "responsive" [Laughter] with respect to something that I have done and in a pleasant way.  [Laughter] So, I think that there are some aspects of the Policy Statement that deserve further review and maturation.  The four percent limit has been noted.  And as we noted in our Policy Statement, that is something that can be reviewed.  We are open to further development of the issues, and concerns, and the structure of the market.  And hopefully we will be considered as responsive to those as we were earlier.  And I think I will sort of leave it at that.  And hopefully if there are any questions about the Policy Statement, at least not too technical, I will try to respond to that.  But, from now -- from -- at this point, I think it is kind of fair to say that we are looking with great interest at the efforts of the others on -- here, particularly on this panel, to get this moving.  Peter J. Wallison:  Thank you, David.  And it was good to hear that the FDIC is willing to talk about the four percent limit, which, I think, surprised a lot of people.  At least those of us who are hopeful that we have something that will be useful in the future to supplant, at least in part, the originate-to-distribute system that we are using here in the United States. Questions from the audience, and we have one in the back.  Do we have a microphone?  Oh, yes.  So, it is over here in the corner. Bert Ely:  I wonder if I might ask a question to David while we are waiting for -- on the mike and that is, it seems to me -- and Tim could address this -- that one of the keys -- one of the absolute keys to -- Female Voice:  Bert can you turn your microphone on? Bert Ely:  Oh, I am sorry.  Excuse me -- question for David.  It seems to me -- and maybe Tim would have some thoughts on this -- is that one of the absolute keys of the efficiency -- the issue and efficiency -- of covered bonds is the absolute certainty of payment, on time, on the interest and principal on the covered bonds.  And with that thought in mind, a bank failure or the failure of a bank that has issued covered bonds should essentially be a non-event.  In other words, it should not in any way whatsoever, for even a second, disrupt the cash flows coming back to investors, what happens to the collateral, or the -- what happens to the bonds that there would not be any early payoff.  Question -- my question with the FDIC is why cannot you just simply give that absolute guarantee that there will be no disruption in any aspect of covered bonds and, in effect, a bank failure from a covered bond investor's standpoint will just be a non-event? David Wall:  Well, I think that the intent of the Policy Statement is to go certain ways towards that.  To the extent that that is not a -- that that represents a serious issue for the market, I think that is something that will be part of the discussion mix going on.  But, I mean there are a lot of considerations that go into how a -- how this program sort of gets set up.  And I am not sure what would be needed to provide what you term an absolute positively guaranteed payment is -- I am not sure what would go into that.  And so I am not sure I can really address that fully.  I am sorry. Peter J. Wallison:  Yes. Alex Pollock:  I have, as was clear from my comments, a suggestion of what is needed.  It is legislation making the bondholders right to the collateral indubitable. Peter J. Wallison:  Any other comments on the panel on that issue?  Tim, no?  Okay, in the back. Oliver Ireland:  Oliver Ireland from Morrison & Foerster.  One comment, Peter, you had raised a couple of times the idea of a dedicated institution that issues covered bonds.  And it seems to me that if the market wanted that, if there was not sufficient additional benefit from the credit worthiness of a general purpose bank, it would be possible under current law to create such an institution that also benefited from interest rate exportation and of preemptions so that it could operate on a national basis.  And there are possibly a couple ways to get there. But, I had a technical question on the FDIC Policy Statement that, I think, goes to the issue that Bert just raised.  And as I read the Policy Statement -- and I may be reading it incorrectly -- it seems to contemplate the possibility of post-insolvency interest.  But, then the damages paid on repudiation are based on the valuation on the date of insolvency.  So, as I understand the Policy Statement, if the FDIC repudiated on day 80 so that the 10-day period expired on day 90, the interest rate risk would be 90 days and not 10 days.  Because what would happen would be you would deduct in the payment you made on the bonds the amount of interest that had been paid during that 90-day period.  And I think that goes to one of the issues that Bert had just raised.  I hope I am reading it incorrectly or that the FDIC would exercise or repudiate the bonds immediately so that you would not get this kind of larger amount of interest rate risk. David Wall:  Yes, I think that is -- I mean the FDIC has said that it is going to try to address these things as quickly as possible and -- but I think that there is an inherent interest rate risk to a certain extent in there. Greg Baer:  Let me just say, I mean to some extent I think these issues will be worked out -- Oliver Ireland:  Yes. Greg Baer:  -- in the marketplace.  I mean when I got involved with this, I told somebody it was sort of refreshing to work on legal issues that could all be expressed in basis points.  And the difference between a 90-day stay and a 10 -- and 10 days and no par plus accrued interest assurance versus par plus accrued interest assurance are significant.  We do not know yet what the difference is between QFC status, and zero days, and 10 days.  With any luck we will be finding out because you can look at these things, where they trade LIBOR.  We have graphs.  You can see where U.S. issuance is, where Canadian, German, everyone, and we -- and they will be learning on this.  And I think it is terrific to hear that the FDIC, to the extent that it becomes a meaningful number of basis points, is willing to look at this again.  I think that is a very important thing. Bert Ely:  Just to add a point, the Garrett legislation addresses that issue by classifying a covered bond as a QFC, which really tightens it up.  And I think that is one of the most important reasons for Mr. Garrett's legislation is to basically minimize, as much as possible, the uncertainty, so as to minimize the cost of protecting against the vagaries of the FDIC. Peter J. Wallison:  I thought in a QFC -- a qualified financial contract -- under bankruptcy law at least -- maybe the same thing is true with the FDIC -- but that gives the holders of the bonds immediate access, does it not, to the collateral?  And so that is a very significant thing.  It -- however, it is a very difficult thing to work into the FDIC's system.  Okay, next question right up here.  Heidi Crebo-Rediker:  Hi.  Heidi Crebo-Rediker, New America Foundation.  I am heartened that the two market participants up there are comfortable that this can be launched with a structural as opposed to a legislative framework because that is fairly key.  But, now that we hear this morning that there is a covered bond law that is being reviewed, I am little bit concerned of the gap between the, "Take it slow.  Keep it simple" that Tim and Neel were referring to, because part of that is restricting the collateral that is eligible for the covered bond pool to residential mortgages right now. My question is since the European covered bond market that we keep referring to as this $3 trillion number is approximately 30 percent public sector bonds as opposed to mortgage-backed, does the public sector collateral appear in the legislation that is being proposed?  The public sector meaning backed by state, municipal, local issuers, or governments that fund things, amongst other things, infrastructure in the European market.  So, my question is, in looking forward to adding the public sector element to it to perhaps kick-starting a new source for infrastructure finance in the U.S., is that included in this law? Peter J. Wallison:  Okay, Bert, do you have an answer to that? Bert Ely:  It is not.  You raise an interesting point that Tim and I have talked about in the past.  The problem you have in the United States, although it is a solvable one, is the fact that the interest paid on municipal debt that is state and local government bonds is tax exempt at the federal level and, in many states, at the state level too.  So, the question is, how do you preserve that tax status so that covered bonds could compete against municipal bonds and state bonds?  And I think it is actually a fairly simple thing to do.  When you think of the fact that we have tax exempt municipal bond mutual funds in this country that what you could have is a flow through situation, but it would take an amendment, in all likelihood, to the Internal Revenue Code such that a bank or whatever could issue -- would in effect would be tax exempt covered bonds that would -- could only be invested in tax exempt government security -- or state and local government securities so that you had a flow through from -- of the tax exempt nature of state and local government debt to the investors. And I believe this is very important.  It goes back to a conference that I held here at AEI very recently on municipal bond finance.  The fact is that municipal bonds are not necessarily a very efficient way to finance infrastructure in this country because of this -- of there are so many issuers.  Many of them are small.  They are not well-known.  And, in a sense, they are almost like community banks that might want to issue covered bonds. So, what I would see as covered bonds as a tremendous financing potential, and an efficient financing potential for particularly local government, if you can get past the tax problem -- and my sense is that that should be solvable and can be done without any meaningful budget deficit -- or any meaningful budget impact. Peter J. Wallison:  Bert and others on the panel that hear the discussion about what is in the cover pool and if it includes things other than mortgages, are we only talking about a system of mortgage finance or are we talking about an entirely new system -- Tim Skeet:  Can I perhaps -- Peter J. Wallison:  -- of financing? Tim Skeet:  I think we -- again it is step by step isn't it?  When we had the earliest discussions about this product down the road here, we certainly put on the table the possibility of using it to finance public sector loans of various kinds, and I think that would be a very positive development of the product. But, right now we do not have the investor-base ready.  Many people have stuck their hands up on the Policy Statement and said they are interested.  They are going to do the work.  I think that is a very logical evolution of this product once we have a product and once we are out there in the markets.  So, I think it is something we can look forward to.  Bert has pointed to some practical issues that need to be sorted out.  You know, these are times when we have to spend our time very wisely.  So, again, I think let us keep it simple.  Let us try and do what we have set out to do right now and let us move on when we are ready to move on rather than trying to invent everything all in one go and then run the risk of getting something wrong. Peter J. Wallison:  Well, but let us just -- Tim let me ask you this and that is, are we talking about a mortgage finance system, or are we talking about financing other things? Tim Skeet:  Well, in the fullness of time, in Europe we have several different underlying asset classes.  This structure, if investors do embrace it, is certainly capable of dealing with other types of asset in the underlying pools.  So, I do not think anyone is excluding those asset pools or excluding those potential structures.  I think it is just a matter of when do we do it.  At what point in time do we get around to embracing it.  My argument is let us try and focus on what we are doing now.  At the end of the day, let us keep these discussions very practical and down to earth since we have got quite a lot of work to do. Peter J. Wallison:  Alex. Alex Pollock:  In my view, the overwhelming priority is a mortgage financing alternative and that is where all of the effort ought to go for the time being.  I will also say that as you talk about other classes, it depends a lot on the inherent asset quality if you take seriously my view that the overcollateralization issue is important and how the overcollateralization relates to the FDIC's exposure.  That is a manageable problem with high quality mortgages.  We know that.  So, let us do mortgages first and get that done. Peter J. Wallison:  But, there is not any -- I will get to you in a second, Bert -- I am just wondering is there any restriction in the legislation about what the bond proceeds are to be used for?  Does it say they are to be used for mortgage financing? Alex Pollock:  Well, by definition, if you have got the cover pool made up of mortgages -- Peter J. Wallison:  But -- Alex Pollock:  -- and your financing it, but now what happens -- Peter J. Wallison:  But, my point is, we are talking about other things in the cover pool other than mortgages and so -- Alex Pollock:  No, I am not.  I am suggesting only mortgages. Peter J. Wallison:  Yes, you are.  Yes, of course. [Laughter] Peter J. Wallison:  But, I hear others saying that there will be other things in the cover pool other than mortgages.  Bert. Bert Ely:  Peter, I think as bullish as I am on covered bonds, I think it is important to focus on mortgages for two reasons.  Number one, compared to other asset classes they are relatively homogeneous. The second thing, it is a huge market.  We have $11 trillion of owner-occupied mortgage debt outstanding in this country.  Ten billion of it -- or excuse me -- $10 trillion of it is basically first mortgages.  There is a tremendous market potential there which is needed in order to build the market -- build the investor interest and to get the liquidity, which will help to narrow the spreads and bring down transaction cost. Peter J. Wallison:  Well, I think that is right, but we are -- the fact that the mortgage market is so large is wonderful.  It is a great opportunity.  On the other hand, if we are not treating covered bonds as a way solely of financing mortgages, we are losing an opportunity to supplant a dysfunctional system that we are using here in the United States. Bert Ely:  Chris Russell [phonetic] there may have something to say about it.  He works for Mr. Garrett, and he can talk about the legislation. Peter J. Wallison:  Yes, where is the mike?  Can you bring that over, please? Chris Russell:  Thank you, Chris Russell with Congressman Scott Garrett's office.  Just one point on some of the specifics in the legislation.  I just want to keep everything -- everyone's mind on is that the legislation is there and has been proposed to establish -- to help provide certainty to investors that they will get their -- that they can get the repayments of their collateral. In terms of the specific assets that would be eligible, the specific limits on liabilities, I mean we still have it opened up for FDIC and the joint rulemaking to come in and lay out some of those specifics and be able to have that flexibility going forward as the market continues to adapt and evolve.  The legislation is really -- the main focus of it -- is to provide that certainty to investors to encourage -- to show them -- or to reassure them that their money -- that they will be able their collateral back in case of a bank failure.  And the specifics can still be changed as we go with the -- with rulemaking. Peter J. Wallison:  Okay, we have one last question.  I think we have time for one last question and that is right over here.  Noel. Male Voice:  The Fannie Mae guy who is [inaudible]? Hi.  Noel Fay [phonetic] from Fannie Mae.  [Laughter] Alex, you mentioned -- you talked about the subfinancing nature of the [indiscernible] that the proceeds plus the capital.  I imagine for the FDIC it is actually not so much the subfinancing nature existing, but it is the evergreen nature of it, where if assets start to deteriorate basically the toxicity of the bad assets is concentrated in the estate just after the FDIC.  And, Bert, I do not think your diagrams are representative of past MBS, which is sort of the bread and butter MBS out there. [End of File:  10319.mp3] [End of Transcript]</body></html>