The Collins Mixer

Robert Waldmann

Republican Susan Collins proposed an amendment to tighten bank capital reqirements. It passed unanimously, but might be removed in conference because the Obama Treasury is opposed. The world is upside down. One key issue is whether banks can use “Trust preferred securities” to evade satisfy capital requirements.
After the jump, I will ask the wikipedia to explain (yes I use the wikipedia and I’m not ashamed to admit it – OK I am ashamed but I admit it anyway). The bottom line is “They got away with doing thant !?!?!” Note US Democrats are fighting Europeans and Collins to keep the loophole open.

So Ms Wikipedia, what is a Trust-Preferred Security ?

The issuing company forms a Delaware trust (a Connecticut trust is also common) and holds 100% of the common stock of the trust. The trust then issues preferred stock to investors. All of the proceeds from the issuance of preferred stock are paid to the company. In exchange, the company issues junior subordinated debt to the trust with essentially the same terms as the trust’s preferred stock. All steps except the formation of the trust occur simultaneously. If the issuing company is a bank holding company, it will also usually guarantee the interest and maturity payments on the trust preferred stock.

OK so it is preferred stock with a full faith and trust guarantee on the payments – that is to say debt. What’s the point Ms Wikipedia?

if they are issued by a bank holding company, they will be treated as capital (equity/own funds) rather than as debt for regulatory purposes. This is why trust preferred securities are issued overwhelmingly by bank holding companies,

That’s a joke right? They can’t possibly get away with that can they? Of course that answers the question of what is the special purpose of the special purpose entity. I think the point is that, if a bank issued preferred shares and guaranteed payment on those preferred shares, then it would be too obvious that the shares are debt for regulators to pretend not to notice.

This is an absurd scam, but recall, our US government is arguing that it is OK. And a Republican (who isn’t even named Snowe) called BS.

I need a drink. Make it a collins.