Investors in a popular security were left scratching their heads as the Senate Finance Committee began discussion of its tax proposal on Thursday.
Many holders of banks' trust-preferred securities spent the last eight months betting that the tax-writing committees of Congress would move to eliminate the tax deductibility of the popular securities.
Without favorable tax status, they reasoned, issuance of the securities would surely decline, increasing the value of those securities already issued.
But that hasn't happened.
Sources close to the committee noted that the pair of Treasury Department officials who devised the language threatening trust-preferreds- Leslie B. Samuels, the assistant secretary for tax policy, and Cynthia Beerbower, deputy assistant secretary for tax policy-are no longer with the department. Other supporters of the language have been mute, particularly in the last two weeks.
One tax lobbyist who declined to be identified argued that the proposal never had a leg to stand on.
"Trust-preferreds are a lot more like debt then they are like equity," said the lobbyist. "It was hard to defend treating them like equity for tax policy. There was really no good reason to prevent banks from accessing an attractive low-cost source of capital."
The lobbyist said he does not think the proposal is dead because "revenue-raising proposals never completely die," but added, "it was a certainly a positive sign."
It was not so positive for investors who took to heart the flurry of reports from Washington asserting that the window of opportunity on the securities would close.
"It was in the self-interest of Wall Street to tell investors that the window would close," said an investor whose portfolio of $13 billion in bonds has a considerable amount of trust-preferreds. "They took an educated guess, and it wasn't a very good one."
One capital markets expert agreed: "I think people were caught a little off guard" by the Senate's bill.
"In February, when the President released his budget, the marketplace definitely thought that the bill would be included," the expert said. "Just three weeks ago a client of mine (who is an investor in trust-preferred securities) said that 75% of the Street thought it would be included in Chairman (William V.) Roth's bill."
The upshot, said Joseph J. Labriola, who heads the corporate bond research department at PaineWebber Inc. is that investors who came late to the game have lost millions of dollars. "The spreads on these securities are widening every day, although most of the damage has been done" Mr. Labriola said. "The absolute spread on most trust-preferred securities are about 10 to 15 basis points wider from their tights two weeks ago."
Absolute spread is the difference between the securities yield and the yield of comparable securities.
Mr. Labriola said investors still can find value in the securities by focusing on the technicals-such as the coupon, call price, and dollar price of the security-which are more important now than fundamental issues.
Nevertheless, he warned that the market for trust-preferred securities could become bumpy over the next couple of weeks "given the fact that the window is not shut and we have the Federal Reserve still deciding what to do with rates."