- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Barney Frank 

Chairman 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chairman: 

July 28, 2010 

I am writing in response to your request for my views on recent legislative 

proposals concerning covered bonds. 

The FDIC has long supported a vibrant, sustainable covered bond market. Before 

the crisis, the FDIC worked closely with Washington Mutual and Bank of America when 

they launched the first U.S. covered bond programs in 2006. As a result, Bank of 

America was able to issue covered bonds at a lower cost than many European issuers. In 

2008, the FDIC issued a Statement of Policy that set standards the industry agreed 

created a framework for an active U.S. covered bond market. The FDIC worked closely 

with Treasury in its development of supporting 'best practices' for covered bonds. 

Unfortunately, the market collapse of 2008 prevented initiation of any new covered bond 

programs. Even during that crisis, however, the FDIC was able to sell Washington 

Mutual's covered bond program intact to JPMorgan in a failed bank resolution 

transaction - demonstrating the effectiveness of the process outlined in our Statement of 

Policy. 

As you know, covered bonds are general obligation bonds of the issuer, normally 

an insured bank or thrift, with payment secured by a pledge of a pool of loans. This 

inherently involves significant over-collateralization beyond the face amount of the 

bonds. When a bank fails, the FDIC must have flexibility - as it does under current law 

for any other secured claim - to recapture this over-collateralization. To prevent moral 

hazard and to protect the Deposit Insurance Fund (DIF), we have suggested that the FDIC 

must continue to have the flexibility to perform under the covered bond program, sell it to 

another bank, tum over the collateral to the investors, or terminate the covered bond 

agreements, pay the face amount of the bonds, plus accrued interest due, and recapture 

this over-collateralization. 

Unfortunately, proposals we have seen would require the FDIC to hand over the 

excess collateral to covered bond investors without effective compensation. No other 

secured creditor has such rights under banking law, the Bankruptcy Code, or long-
standing American law, which has always limited any secured claim to the value owed -

here defined by the face amount of the bonds. Adoption of these proposals will increase 

the costs to the DIF by taking away the value of the over-collateralization and turning it 

over to the investors. 

Again, thank you for soliciting our views on this matter of great importance to the 

FDIC. We stand ready to work with you and your staff on legislation that will support a 

healthy, vibrant covered bond market in a way that promotes market discipline among 

covered bond investors and protects the Deposit Insurance Fund. 

Sincerely, 

Sheila C. Bair 
(b)(2) (b)(2) (b)(2)

e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Jeffrey Merkley 

United States Senate 

Washington, D.C. 20510 

Dear Senator Merkley: 

September 3, 2010 

Thank you for sharing your views with me relative to the proprietary trading and 

conflicts of interest sections of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act. I have placed them in the public docket and we will consider them 

carefully as we move forward with our rulemaking process. 

We appreciate your interest and comments regarding this important issue. If ou 

have further questions or comments, please do not hesitate to contact me at ~--- or Paul Nash, Deputy for External Affairs, at --- ------- Sincerely, 

Sheila C. Bair 
(b)(2) (b)(2) (b)(2)

- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Carl Levin 

United States Senate 

Washington, D.C. 20510 

Dear Senator Levin: 

September 3, 2010 

Thank you for sharing your views with me relative to the proprietary trading and 

conflicts of interest sections of the Dodd-Frank Wall Street Refonn and Consumer 

Protection Act. I have placed them in the public docket and we will consider them 

carefully as we move forward with our rulemaking process. 

We appreciate your interest and comments regarding this important issue. If ou 

have further questions or comments, please do not hesitate to contact me at 

or Paul Nash, Deputy for External Affairs, at _____ _ ----- Sincerely, 

Sheila C. Bair