Bank Lobbyists Fighting New Provision on Trust Preferred CDOs

Turns out mortgages weren’t the only toxic assets that were packaged into CDOs. Small community banks issued billions of dollars in trust preferred securities before the credit crunch as a way to prop up their capital cushions. Problem is, the only way they could sell the so-called TruPS to investors was to bundle them up into CDOs.
Author:
Publish date:

Turns out mortgages weren’t the only toxic assets Wall Street decided to package into CDOs. Small community banks issued billions of dollars in trust preferred securities before the credit crunch as a way to prop up their capital cushions. Problem was, the only way they could sell the so-called TruPS to investors was to combine them with other trust-preferreds in CDOs.

Now, those CDOs, which were purchased by some of the same small banks that issued them, are beginning to default, leading to a downward spiral of losses for banks. A provision in the new financial reg bill passed by the Senate forbids counting TruPs as Tier 1 capital. If it passes, smaller banks could be forced to raise $130 billion to meet capital requirements or sharply curtail lending. (Big banks like Citigroup have issued trust preferred's for a long time, but most of those were not packaged into CDOs.)

Not surprisingly, the banking lobby is fighting the provision. But that could be tough given the FDIC and Sheila Bair support the proposal. There’s also this:

TruPS CDOs are also at the heart of a series of lawsuits brought by the liquidation trustee for Northbrook, Illinois- based Sentinel Management Group Inc., a cash-management firm that collapsed in 2007. The trustee sued First Horizon, KBW and Cohen & Co., a Philadelphia-based securities firm affiliated with a family involved in almost half of such CDOs, saying their bankers bribed a Sentinel employee with Super Bowl tickets, strip-club visits and dinners at restaurants such as Tao in New York to get him to buy risky low-ranking slices of the CDOs.

Banks in ‘Downward Spiral’ Buying Capital in CDOs [Bloomberg]

Related

Sweet Gigs: This Guy Collects $400K a Year for Doing...Not Much

So there’s this guy. A mild-mannered professor who retired a decade ago and decided he would serve as an independent director of this new booming financial product called a CDO. He collected a few thousand bucks a year for basically signing a some documents. Sounded like a decent gig and a good way to make some extra pocket change.

Today In Swiss Banks With Creepy But Defensible Structured Products

I don't really understand it but the TVIX thing is creepy fun. If you haven't followed it, Credit Suisse issued this exchange-traded note called TVIX that was a 2x levered bet on the VIX. They suspended new issuance about a month ago due to position limits, and people were just so damn excited to own the thing that its price crept up to 189% of its fair value, where "fair value" is a reasonably easily measurable thing based on the formula in the TVIX prospectus. Then last week Credit Suisse announced that they would be creating more units, and the price plummeted to and then through fair value, which is what you'd expect to happen. Except that it started plummeting a few hours before that announcement, which is Suspicious. So of course people are sad and so there's a Bloomberg Brief with sort of sad-funny quotes like: “When it started to fall, I bought more because I couldn’t believe how low it was going. I didn’t realize I was playing with a hand grenade.” – Michael Gamble [heh! - ed.], 67, who doubled down on his TVIX investment before the price collapsed. Investors “all think: ‘Oh, I’ll just buy these things, I’ll be hedged against volatility and everything will be wonderful.’ And now they’ve seen the market goes down and their volatility protection goes down too, and they’re going ‘Hmm, what happened here?’ These people are going to have to pay a really expensive lesson.” – Larry McMillan, who manages $30 million as president of McMillan Analysis Corp. So, yes, Larry, they are going to pay a really expensive lesson. But what is it? Stephen Lubben has a little thing in DealBook today where he frets: