Magazine article American Banker

House Tax-Relief Bill Leaves Investors Jumpy about Trust-Preferreds

Magazine article American Banker

House Tax-Relief Bill Leaves Investors Jumpy about Trust-Preferreds

Article excerpt

A tax-relief bill the House Ways and Means Committee proposed this week is making investors in a hybrid bank debt security nervous.

What worries them is that the bill ignores the subject.

Bankers and many on Wall Street expected the committee to produce a tax relief bill eliminating the tax deductibility in trust-preferred securities, which have enjoyed a surge of popularity since their debut last year.

Investors hoped the tax break would be eliminated. Bankers hoped it would be spared.

Trust-preferreds let banks raise regulatory capital cheaply and offer attractive yields to investors. But critics view them as an example of "corporate welfare."

Talk of removing the tax deductibility feature has been active in Congress for months, and action had long been expected in June. But the House proposal-presented Monday by Ways and Means Chairman Bill Archer, the Texas Republican, did not mention the securities at all, suggesting that their tax deductibility may remain intact.

In fact, one Washington lobbyist said eight House Democrats wrote letters to Rep. Archer, saying they did not want the issue brought up in the tax policy blueprint.

Many investors, however, were caught by surprise and did not take the news well.

When Rep. Archer presented his bill Monday, investors poured out of the securities, forcing spreads out by 5 basis points.

While some investors crept back into the market, anxiety still was apparent during Wednesday trading, some observers noted. …

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