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Strategies & Market Trends : 50% Gains Investing
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To: Crossy who wrote (93453)8/25/2010 11:09:09 AM
From: Keith FeralRead Replies (2) of 118717
 
Preferreds are hardly a cheap form of capital. The interest payments from the preferreds are taken out after taxes. That's why the TARP repayments were accretive to the banks. It reduced BAC's after tax interest payment from $1 billion a quarter to $350 million per quarter once they repaid TARP.

The banks now have a window to replace the TRUP's with other capital. If banks paying 8% on preferreds and had a way to redeem those shares, they won't blink an eye. That doesn't need they will have to replace the trust preferred with more common equity, so long as they can generate sufficient capital to replace that equity.

Most of the US big banks are sitting on about $20 billion worth of TRUP's. BAC is getting ready to realize a $10 billion profit on CCB shares that might be yielding something on the order of 4% a year. If they used that capital to replace $10 billion worth of TRUP's costing them 8%, it would be a no brainer.

Still, it's a great form of income. I have no idea how much longer alot of the high yield TRUP's will be available. It makes no sense for banks to be shelling out 8% on any type of capital when they are lending money at 4.5% for mortgages. My guess is that they will simply run off this form of high interest capital as it serves their interests.
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