THofler

Bank Bailouts and Trust Preferreds: Still Too Much Risk Here

kewgardens,

Your are correct about the share price moves. There are only two Citi traditional preferreds that I could find, C-M and C-P, and their share prices went up, as did the TruPS. Hmmm... I could be wrong, but I read the news release on the Citi/InvestorRelations site,

www.citi.com/citi/pres...

My reading says: no more dividend payments for the traditional preferreds, but they will maintain distribution payments for the TruPS. The volume on C-M and C-P was very high too. Is this perhaps an arbitrage play?

If the preferred conversion has an effective conversion price of $3.25, then if you buy C-M at $8, then effective conversion price is about $1.00. So if you can short the common at $1.6 you make $0.6 per common share? Comments?

Bank Bailouts and Trust Preferreds: Still Too Much Risk Here

Crispycrunch,

Graham did not simply dislike preferreds; he strongly discouraged buying them at par. He was actually a fan of buying them at a steep discount, so that there a higher yield and a decent chance of capital appreciation.

I didn't understand what a "trust" preferred was until today while trying to figure out the market action with Citi. A TruPS is a preferred where the corp. gets the same tax break as when issuing bonds, plus the TruPS "debt" is off-loaded from the balance sheet.

One of the main complaints Graham had about preferred was: Why issue them without any tax breaks, when you could issue bonds and collect the tax breaks. There must be a reason why preferreds would be issued in a tax disadvantaged way. Namely, the investor is getting a bad deal. The quality of the deal is leveled by only buying them at a discount.

However, a TruPS DOES have the same tax advantage as a bond. I guess they didn't exist when Graham was around. My guess is that the TruPS should yield more than a traditional preferred all other things equal.

But in this rotten environment, the kicker is that TruPS are more senior than the traditional preferred. So while the traditional Citi preferred holders got their butts kicked today with the loss of their divys, the TruPS soared in value as their divys were secured.