This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Banks Find New Way to Squeeze Investors: Street Whispers

NEW YORK ( TheStreet) -- Fixed-income investors are in the midst of a harsh transition as banks redeem their trust preferred shares.

In June the Federal Reserve proposed enhanced capital requirements for large banks that exclude most trust preferred shares from regulatory Tier 1 capital. Since this is considered a "capital treatment event," banks can redeem their trust preferred shares, even before the call date, often at face value, despite any premium the market previously placed on trust preferred shares paying high dividends.

Investors who "went in" over the past several years -- while possibly paying premiums for trust preferred shares on top of any commissions paid to their brokers -- are not only facing possible capital losses, they face a huge headache in trying to replace as much of their lost income as possible, without greatly increasing their risk.

Investors who traditionally relied on municipal or corporate bonds for income, have faced a difficult choice for nearly two decades as yields have declined, either to accept ever-shrinking yields or broaden their horizons.

Under the Federal Reserve's proposed new capital rules, banks will be able to have noncumulative perpetual preferred stock making up between 1% and 1.5% of their Tier 1 risk-based capital ratios.

So we're in the midst of a wave of trust preferred redemptions, with some banks and financial services companies also issuing new preferred shares with lower coupons, that are noncumulative, meaning that dividends can be suspended without missed dividends in arrears being paid.

Banks are benefiting greatly from this transition by lowering their interest expenses.
  • JPMorgan Chase (JPM - Get Report) on July 12 redeemed $9 billion in trust preferred shares, including nearly $4.2 billion with coupons higher than 6.5%. All the shares were redeemed for face value.
  • Bank of America (BAC - Get Report) on July 25 redeemed $3.9 billion in trust preferred shares, all of which had coupons of 6.00% or higher, with $2.3 billion paying over 7.50%. The company paid premium redemption prices for $1.8 billion of the redeemed trust preferreds. When Bank of America announced its second-quarter results on July 18, the company said that the retirement of trust preferred securities and debt, combined with "additional liability management actions announced for the third quarter of 2012, are expected to benefit quarterly net interest income by approximately $300 million, of which $60 million was recognized in the second quarter of 2012."
  • Many regional banks are also following the trend, as the regulators have given them no choice, including BB&T (BBT) of Winston-Salem, N.C., which in July redeemed $3.1 billion in trust preferreds at face value, of which $350 million paid a fixed rate of 8.10%, while $575 million paid a fixed rate of 9.60%.

Speaking about the current wave of trust preferred redemptions, one veteran Wall Street bond portfolio manager says "people are definitely upset and perplexed, but one way [quality-seeking] investors can try to make up for this, is to buy these new perpetual preferreds, all of which are noncumulative."

The portfolio manager adds that "high-yield spreads are pretty wide, given the relatively good news out there, corporate-wise, at least."

So where do investors go from here? There are many directions to turn, and investors had better bone-up on the various risks and rewards. Here are a few examples, none of which are recommendations. You should sit down with your broker and discuss your new income-generating investments at great length, to fully understand all the risks.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
APU $39.64 -0.08%
BAC $17.47 0.00%
GE $30.66 0.23%
JPM $66.78 -0.15%
KMP $102.03 1.98%


Chart of I:DJI
DOW 17,812.19 +19.51 0.11%
S&P 500 2,089.14 +2.55 0.12%
NASDAQ 5,102.8080 +0.33 0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs