Too Small to Fail?

After standing up investors in the TruPs market like prairie dogs with a lion nearby, Volcker regulators told them to relax this week. Cancel red alert. No forced selling at the present time will be required. You are exempted.

The interim rule will allow CDOs with TruPs collateral issued by small banks (less than $15 billion) to avoid Volcker consequences. The exemption is framed around small issuers, and its consequence mostly implicates small investors, since many small regional banks were the ones holding these CDOs. So we’ve had Too Big To Fail. Too Small To Fail only seems fair. *

A few hundred regional banks spent the holidays worrying about potential write-downs of over half a billion dollars. Talk about shaking the (Christmas) tree. At DealVector, we had quite a bit of inquiry related to figuring out just what would fall to the ground as a result of that shaking. And several banks, probably confident that they were pursuing the prudent course, did go ahead and sell their positions because of the regulation, realizing significant losses.

But now the pressure is off. It will be interesting to see how many of the conversations started in the last 5 weeks will continue anyway, now that people have begun talking. After all, even though forced selling has been delayed, the 5 year TruPs deferral period is now ending for most issuers (or will end within 12 months). This is the real challenge facing investors and issuers. Stay tuned.

*A few large banks also will helped along the way ….