Wachovia’s new $2.5 billion bank hybrid offering – Wits (Wachovia interest trust securities) – priced at the end of January, initially sparked controversy that the Federal Reserve had made a mistake in allowing the deal to qualify for tier 1 capital. But the Fed has stood by its decision to allow the structure into the tier 1 capital basket. This could prompt more innovation and more than $40 billion of new issuance.
Wits is a mandatory convertible into preferred shares after five years, on which interest payments are tax deductible. Since the mid-1990s until recently, the only tax-deductible hybrids acceptable to the Fed as tier 1 capital were trust preferred securities (Trups). Many market players believe that banks will replace some of their outstanding Trups issues as...
