This regards "trust preferred securities." CFC-PB is, of course (I just confirmed with quantumonline), a trust preferred security.
Two closed-end funds I have held this year, are Flaherty&Crumrine/Claymore funds. One is FFC, their 'Preferred Securities Income Fund.' The other is FLC, their 'Total Return Fund.'
But before y'all think this post is to tout those two closed-end funds, hold on! That's not my intent! What the post really is trying to do is to pass on some comments from their management on trust preferreds.
I found the following three paragraphs in each of those two funds' management letters in their latest quarterly reports to shareholders, which arrived this week. Management is discussing the passage of the Wall Street reform act in July, and makes comments that may explain (in part, of course) why trust preferreds have been increasing in price and heading closer to par. Also, there is some interesting grist in these paragraphs about what is going to happen to trust preferreds between now and 2013.
(To the best of my knowledge, FFC and FLC do not hold CFC-PB. I am merely passing on comments on trust preferreds as a whole, as this board in the past has been relatively active and sane. I am familiar with this board because I used to hold CFC-PB.)
The excerpt from the FLC and FFC quarterly reports:
"Since our last letter, rule makers have indicated which security structures they don't like, but have yet to decide what will be okay. It is now clear that trust preferred securities, which are favored by banks as a form of capital, will not meet the new standards. As a result, not only will thre be no new issues of this type, issues will want to redeem or replace outstanding trust preferreds sooner than was previously expected. In response, prices of many bank trust preferred scurities have moved higher--contributing to the Fund's strong performance.
"It is less clear what types of securities banks will be allowed to issue to meet future capital requirements. We are monitoring the debate closely and throwing in our two cents whenever appropriate. At this time, we believe the parties are moving toward a sensible conclusion and will ultimately induce banks to issue preferred securities suitable for the Fund's portfolio. Of course, we will stay on top of this and report important developments in these letters or on the Fund's website.
"As of this writing, roughly 24% of the Fund's portfolio is invested in trust preferred securities issued by U.S.banks. In light of the new rules, we think it is likely that many of these issues will be redeemed, beginning in 2013. We'll have our work cut out for us trying to replace the income on these securities, but until we have a better idea how the banks will replace these issues, it is difficult to predict the impact on the Fund."
There has been a lot of discussion about this topic on this board and elsewhere in the months since the Frank-Dodd bill was passed. The consensus seems to be that most Capital Trusts have become eligible for redemption even if they are not yet callable. That's because the prospectus for most Capital Trusts include a provision that allows the bank to call them as soon as their regulatory treatment changes or as soon as the legislature or the Fed or OCC propose or create laws or rules that would impact their capital structure. In fact from my reading, there are numerous times after the Frank-Dobbs bill was proposed that banks could begin calling Capital Trusts and still meet their contractual requirements.
I would expect more will occur as well. BAC will probably eventually call theirs as well; but right now, BAC is probably a little distracted by Forclosuregate and may be a little reluctant to give up cash reserves with all that risk on the horizon.
Even so, Bank Capital Trusts have been very, very good for Joel Corley... I'll be sorry to see them go.
There may be a chance of the Frank-Dodd bill being amended to allow modified trust preferreds to count as tier 1 capitalization for banks with over $15B capitalization. I also understand the Frank-Dodd bill may allow community banks with <$15B capitalization to continue issuing 'trust preferreds'
From my readings, I think non- banking institutions will be allowed to continue existing and new trust preferreds. Is that your understanding?
Further, I understand the Frank-Dodd bill allows existing trust preferreds to stand until 2013 when 'phased call liquidations' must begin. Agree?
Debt in the form of bonds, has been proven untrustworthy by the losses suffered by GM bond holders.
The field of investment opportunities is getting smaller and smaller and riskier and riskier. Investing in agricultural crop or mineral commodities would be a real crap shoot due to so many unforseen risks. I am hoping Congress comes to their senses and just modifies 'trust preferreds' to be acceptable for tier 1.
With the Republicans taking control of the house, trust preferreds may continue to be counted towards bank capital. Further, debt is supposed to be most secure and we see how secure GM's debt was: GM bond holders were wiped out, so debt is no good either...lol. And U.S. Treasuries are no good when the Fed floods the market with $600 billion in funny money. I guess that leaves just gold, but that can collaspe too as in 1980's. Invest in good scotch whiskey.
I think it may be too late to reverse Frank-Dodd, even if I think this part of the bill makes little sense. Capital Trusts have always been backed by junior subordinate bonds. If a Bank Holding company gets taken over, the odds of a junior subordinate bond holder getting any of his investment back is probably down in the single digit percentile range - in other words, vanishingly small.
As for investments, some of us at work have been talking about investing in commodities like grains or the servicing companies or suppliers for farmers and the like. We kind of figure that might be the best bet for now; but some of those very companies have already had a good run-up this year.