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Baa Baa BA

We're still in London. Baa baa BA. Having been told our flight to JFK was on, but would leave 2 hours late and that we were expected to check in at the normal time, we schlepped ourselves to Hethrow only to told upon arriving at the BA terminal that our flight had been cancelled while we were en route to the airport via the Underground. BA failed to use our mobile number or email address to update us.

The departure hall was full of other people in the same boat many of whom had spent far more than we had getting there. There were about 80 BA staffers around to add to the chaos none of whom seemed to be trying to phone passengers. We got rebooked to a flight leaving April 26. About 4 hours later the British reopened their airspace and flying began again. But we had left the airport for Mudchute Manor, our London base.

Being in London helped me get more very important infomation about three yield stocks in the model portfolio, for paid subscribers only of course. And a general update on the outlook for a 4th British share.

Being across the pond, maybe I was too European in my reaction to the SEC charging Goldman Sachs with civil fraud for misselling the Abacus mortgage-backed synthetic collateralized debt obligation. Wrote subscriber Dr. AA, 'are you serious? A synthetic CDO is composed of credit default swaps on mortgage bonds. How can you purchase a credit default swap if there is nobody on the other side. This was a private placement with Goldman functioning as placement agent, not underwriter.'

Dr. AA added: 'I personally read the Abacus flipbook and I have heard it would have been a violation of SEC rules .. had they identified counterparties of the CDS.'

It would not have violated SEC rules but it certainly would have violated standard customer privacy protection. I do not think the Goldman error was failing to identify John Paulson & Co, as the short seller of the CDOs but in failing to inform buyers going long that there was a short seller who had selected the tranches to include.

Further supporting my view is the fact that Goldman has stripped the trader at the center of the alleged fraud of his license to operate here in London. Mr. Fabrice (Fabulous Fab) Tourre has been de-registered with the UK Financial Services Authority but he has not be suspended and continues to be paid for the work he is now not allowed to do. Incidentally it is perfectly possible that Goldman could have created the CDOs without a short seller in the picture.

Here is the news about the British stocks, plus updates from other countries about other shares we cover. The latter only for subscribers.

*The three yield stocks are non-cumulative preferreds from Royal Bank of Scotland, the P (cusip 7800977623); the F (cusip 780097804) and the NatWest preferred C (cusip 638539882). All are NYSE listed, and all are subject to a buy-in by the Scottish bank as part of a $3.2 bn 13e-3 reversal offer filed with the SEC on April 6. The buy-ins are because RBS was essentially nationalized by the UK government after (among other things) its buying ABN-AmRo which was one of the victims of Goldman shenanigans and other mishaps. The European Union competition directorate, under the feisty Neelie Kroes, now retired, ruled that RBS was getting an unfair edge against rival banks thanks to being government backed, and that it would therefore have to stop paying dividends on these issues for two years after April 1.

The conditions for the buy-in include a resolution by the RBS sub responsible, which is likely to be automatic. Tenders must be put in by May 3 and are subject to prorata discounts if too much is offered. Here are the details from Jason Knauf, head of the IR department at RBS.

For the P of which there are 22 mn shares outstanding, RBS proposes to pay $14/sh plus accumualted dividends but no interest for the period since the last payment was made.

For the F of which there are 8 mn shares out, RBS proposes to pay $20/sh.

For the NatWest C (subject of an earlier takeover by RBS), it proposes to pay $21.25/sh for the 12 mn shares out.

The trading prices of the three issues essentially reflect the payout expected except for the NatWest, which you could arbitrage at present prices for a wee gain.

As I wrote earlier, readers who have a need for fixed income should tender their shares. If you want to speculate a bit, you can keep the shares without income for two years and then get the very high dividends when they resume in April 2012. Being non-cumulative, the dividends missed will not be paid then, nor will the modest garnish of the interest to this May 5th when the buy-in is expected to be completed.

As noted earlier, the potential yield on these preferred shares is very high and it is an interesting speculation if you do not need the income for two years.

Here are the risks. First, if you hold these shares in a tax-sheltered account you would have to sell, probably at a nifty profit, before the dividends resume, because it is likely that the British advance corporate tax (which let RBS pay the dividends gross without British withholding deductions) may be eliminated. So you would not be able to get back British withholding tax. I have some of my most recent crisis-time RBS preferreds in my IRA. They will be transferred into the Ross if I ever get around to doing this and the price will reflect the current offer, not what I think they will be worth two years from now.

The biggest risk I can think of is that inflation in the US will be so high by April 2012 that interest at 6 to 8 percent will not be enough to satisfy you. The other big risk is that US taxes on dividends are raised in the interval to cut our deficit. These hybrid securities were created so their payout could be taxed as dividends not interest, but that too may be subject to change.



Disclosure: Long RBS-PRP, RBS-PRF, NW-C