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Covered Bonds & Taxpayer Bailouts

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We figure the weirdest part of Treasury Secretary Hank Paulson's enthusiasm for covered bonds is the untimeliness of the products. In an atmosphere where banks are failing because of bad bets on mortgage assets, having a product that ensures bonds against bank failure with mortgage assets doesn't seem all that exciting.
But, as we've said in this space, maybe the government is counting on investors to buy covered bonds because they are more than they seem. What if covered bonds are "covered" by an implicit government guarantee? That's what Steve Waldman thinks is happening.

A guarantee by the issuing bank has gotta be worth something. If it were 2002 again and the banking industry had adopted this originate and guarantee model (rather than the originate and forget model they chose), perhaps we wouldn't be in the current mess. But it is not 2002. These bonds will be offered by banks that would already have collapsed without vast support to the financial system by the Fed and the US Treasury. Guarantees by money-center banks are no longer bonds of confidence in the prudence or skill of bank managers. The value of such guarantees comes from a different place, from the notion that it is unthinkable the state would permit these banks to fail. A covered bond offered by Citi or Bank of America would only default if a titan collapsed. Investors might reasonably believe that would not be permitted to happen. If they are right, then these bonds are indeed covered. They are covered by you, dear taxpayer.

We're all Fannie Mae now.
Covered by whom? Bonds on what? [Interfluidity]