Soon it will be time for Congress to shout at bankers about derivatives again and that’s fine, but allow me to indulge a bit in mourning for a derivative that Basel III killed today. That being of course SunTrust’s postpaid bifurcated collateralized variable share forward on its Coca-Cola stake:
SunTrust Bank’s third quarter is about to be a bit of a kitchen sink report, and that includes tossing out its old stash of Coca-Cola. … Included in the asset shuffle will be the sale of 60 million shares of Coca-Cola Co. that the bank has held for nearly 100 years, a sale that will lead to a $1.9 billion pre-tax gain in the quarter.
SunTrust had in 2008 entered into two contracts to sell its Coke shares in 2014 and 2015. But after reviewing its position in light of new global capital regulations known as Basel III, SunTrust realized holding onto its Coke shares would punish its capital standing and decided to move forward the sales. The bank also said owning the shares hurt its stress-test results.
Probably nobody cares about this but me, but the derivative in question is among the works of art in the financial world so I want to share it with you.* Basically what happened is (all numbers rounded and split-adjusted): Read more »