NEW YORK (TheStreet) -- Now that the finreg battle over trust-preferred securities has been won, a new TruPS topic has emerged in Wall Street discourse: Buying them.
CreditSights also points out that some ordinary preferred securities appear to be trading at a discount with rich yields as well. Yet some investors and issuers prefer TruPS because ordinary preferreds aren't tax deductible the way debt instruments are. They're also more expensive for banks to issue. Additionally, many investors got burned during the crisis, seeing tons of preferred shares wiped out while senior debt retained more protection. This was a particularly contentious issue when it came to Fannie Mae ( FNMA.OB) and Freddie Mac ( FMCC.OB). The government's decision to put the firms into conservatorship without protecting preferred shares depleted individual investors' savings and drained capital from bank balance sheets as well. Risks persist. TruPS maintain their place in the capital structure, above ordinary stock and below senior debt. But does anyone believe that the country's largest banks are at the brink of failure any longer? The resolution process outlined in the financial reform bill essentially deems them "too big to fail." Even American International Group ( AIG) and Citigroup stock is deemed by some to be
a viable investment again. Regional banks working through credit problems look more ripe for M&A than failure. Small banks with potential may become targets of buyout deals. Thanks to alterations to Collins' reform measure, small banks can also continue to raise capital by offering more trust preferreds. And there are 77 months between now and the end of a "phase-out" period for investors to sniff out opportunities in the TruPS market for bigger banks. -- Written by Lauren Tara LaCapra in New York.