The market for a popular debtlike instrument issued by banks has been thrown into a frenzy as new restrictions draw near.
Prices of the trust-preferred securities surged earlier this week-and then retreated-as investors and issuers tried to guess exactly when Congress would clamp down on the market.
Experts say the big swings may well persist until Congress acts. Many experts predict that Congress will impose restrictions in June, though quicker action was widely rumored early this week.
"This market is subject to a lot of rumors, and there will probably be more to come," said Eric Grubelich, a bank bond analyst at Keefe Bruyette & Woods.
Since their inception last fall, issuance of the securities by banks has boomed, increasing the total market to $37 billion. The instruments have supported banks' share buyback plans and significantly bolstered the market value of their stocks.
Debate on federal legislation to close a tax loophole that has been the basis for the trust-preferreds has dragged on over the last several months.
Tuesday's market illustrated the new volatility, as rumors of imminent action by Congress caused buyers to rush to the instruments. Yields fell sharply compared to those of Treasury securities.
Christopher Hogg of Goldman, Sachs & Co. said the rumors were groundless.
"Congress doesn't work that fast," said Mr. Hogg, who expects banks to continue issuing trust-preferreds until June. He suggested the latest hearsay had been sparked by news that Congress may be close to reaching some fundamental decisions on the federal budget.
Trust-preferreds are widely seen in Washington as a form of corporate welfare and legislation curbing them has been anticipated. Questions have centered on whether Congress will enact a retroactive prohibition, and if so, what the timing will be. So far, there has been no committee action on any such legislation.
Bank bond analyst Thomas Stone of Duff & Phelps Rating Co. said he has no doubt that some banks will be issuing the hybrid securities in the eleventh hour.
"Most of the big guys have already done their issuance," said Mr. Stone. "But until you see the window actually close, you will still have a lot of people (looking for the opportunity to issue)."
The Internal Revenue Service, which looks unfavorably on the securities because of the major tax advantages they carry, could back legislation that is retroactive to Jan. 1.
If that happened, many banks would have to handle their trust-preferred securities with after-tax instead of pretax dollars, making them very unattractive, said Mr. Stone.
Some banks could also be prompted to call their issues and temporarily reduce their capital levels in order to avoid the undesirable costs. "Many banks are well-capitalized. It would put them in a weaker but not necessarily dangerous position," he said.
The end of the securities could also indirectly affect bank stock prices, since many banks have used the securities to backstop their share repurchase efforts.
"However, it is really good fundamentals that drive a stock price and not simply buybacks," added Mr. Stone.
Mr. Stone expects Congress to make any restrictive legislation retroactive to the date of introduction of the legislation itself.
Bank bond analyst Allerton G. Smith of Donaldson Lufkin Jenrette Securities Corp. downplayed the impact of any legislation.
"Banks have zero concern over this,"said Mr. Smith. "Most banks have already issued. And if there is any new issuance it will be minimal to nonexistence from banks." u