TRUPS

Back in the pre-Lehman days Citigroup owned a lot of things that, in hindsight, turned out to be awful. Everyone knows that now but various people didn’t know it then, including (1) the people who bought some of those awful things from Citi, (2) the people who bought stock in Citi while it hung on to the bulk of those awful things, (3) the people who bought bonds in Citi while it hung on to the bulk of those awful things, (4) the people who bought preferred stock in Citi … you get the idea. The world being as it is – full of lawyers1 – each of those groups of people is slowly making its separate peace with Citi. We’ve talked about some of them before, including a rather controversial $285mm SEC settlement on behalf of the awful-thing-buyers and a $590mm private settlement on behalf of the stock-buyers. Today brings the biggest settlement yet, $730mm on behalf of the bond- and preferred-stock and TRUPS-buyers, who lost billions when Citi defaulted on its bonds.

Hahahaha no I’m kidding, Citi never defaulted on its bonds. Here’s the Journal:

In the case settled Monday, plaintiffs alleged the New York company misled them about Citigroup’s possible exposure to losses on securities backed by home loans, understated its loss reserves and said some assets were of higher credit quality than they actually were. The pact covers 48 preferred-stock and bond deals between May 2006 and November 2008.

Those possible exposures became real exposures, and Citi incurred plenty of unpleasantness. But these bonds mostly didn’t. Read more »

I spend a good 40% of my day mindlessly refresing JPMorgan’s page at the SEC hoping they’ve filed a new structured notes prosupp so I was excited to see this:

Following the Federal Reserve’s announcement on June 7, 2012 of proposed rules which will implement the phase-out of Tier 1 capital treatment for trust preferred capital securities, JPMorgan Chase & Co. announced today that each of the trusts listed below will redeem all of the issued and outstanding trust preferred capital securities identified below on July 12, 2012 pursuant to redemption provisions relating to the occurrence of a “Capital Treatment Event” (as defined in the documents governing those securities). In each case, the redemption price will be 100% of the liquidation amount of each trust preferred capital security, together with accrued and unpaid distributions to the redemption date. The redemptions will be funded with available cash.

You can go read the chart but there’s a total of just under $9bn of trust preferred securities with a weighted average interest rate of just over 7%, all being redeemed at par.*

These trust preferred securities are, to simplify ever so slightly, very long-term very subordinated debt securities that qualify as capital for JPMorgan: for the purposes of convincing regulators that JPMorgan is well capitalized, they were roughly as good as common stock, but they are cheaper for the bank because they cost only a 5.85 to 7% (tax deductible) coupon, vs. JPMorgan’s 16% trailing return on tangible common equity or its 13-ish% trailing earnings yield or however you want to compute the cost of its common stock. After last week’s announcement of revisions to the capital rules, these securities will (eventually) no longer qualify as useful “tier 1″ regulatory capital. Under the terms of the securities, if they will no longer qualify as tier 1 JPMorgan has the right to get rid of them, since they were a capital-regulation arbitrage to begin with. And so they will.

WHAT COULD BE MORE BORING. Still, two idle thoughts. Read more »