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birb_cromble  2d ago (text post)   593 thread views

Weekly Finance Thread (without clever alliteration)

A weekly thread to discuss financial matters - from personal all the way up to global.

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What is your opinion on preferred stock?

I waffle between thinking it's a great mid point between bonds and equities in terms of risk, but then I look at the last few market downturns and it doesn't seem like that's actually true. It's hard to tell though, because preferred stock seems like it's uniquely vulnerable to the specific dysfunctions that caused the last few downturns. They're sensitive to interest rates, so 2022 smashed them. They're issued by financials more than other sectors, so the GFC did a number on them as well.

I'm thinking about picking up some PFF or PFXF to dip my toes into this instrument.

It’s prevalent for banks because the pref can be treated as equity for books purpose but debt for tax purposes (properly structured — see TRUPS). So it helps banks pass regulatory capitalization requirements (ie not overly levered) whilst maintaining (for the bank) tax efficiency (ie deductions).

Probably won’t issue any more of it now since how the UBS prefs were treated. But ya banks did like to issue it.

What happened with UBS?

When they merged with CS they wiped out the preferred equity which should be senior but gave basically a bribe of a few bucks to equity to get an easier merger vote.

A cursory search yields this FINRA allegation. tl;dr: UBS allowed its representatives to recommend that clients buy "syndicate" (presumably, UBS-associated) preferred stock (allowing UBS to pocket a 2-percent commission that it then shared with the representatives) and then sell the same stock at a loss 91–180 days later. (Sales of preferred stock were flagged for supervisory review only if they occurred after 0–90 days. This supervision was loose enough to fall afoul of a FINRA rule.) In a settlement, the company paid out 3.5 M$ (2.65 disgorgement, 0.5 fine, and 0.35 restitution), but did not admit any wrongdoing.

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