I just love how the FT can misreport stuff and get away with it. Like “Snakes on a Plane”, it’s so bad, it’s good!
“Are they bonds? Are they stocks? Or are they actually catastrophe insurance?
Bankers declared the birth of a new asset class – contingent convertible capital notes, nicknamed CoCos – after Lloyds Banking Group announced a successful take-up of a £9bn exchange of CoCos for some of its existing hybrids.
Regulators think these instruments are the answer to banks’ capital prayers because they clear up the uncertainties of existing hybrids by converting into equity at a pre-set trigger and price.
But how do CoCo bonds work? Our interactive feature explains.”
You’d think that CoCo’s are a new asset class?
Nope! Old scam. CoCo’s were used as a means to inflate reported earnings. You did not have to report CoCo’s as equity when computing fully diluted earnings. You could pretend the contingency would never arise and therefore, pretend that your yield was that much higher than any sensible definition (based on pragmatism) would allow.
“I don’t like deals that don’t have a real reason other than an accounting gimmick," says Ted Southworth, a fund manager at Northern Trust. The CoCo, he says, is "close enough to a gimmick that we’d probably be better off without it."
FASB Rule 128 dented the enthusiasm somewhat. CoCos became forgotten. Now being revived with the active connivance of the FASB which has been diluting all kinds of rules off late 🙂
So why is this old scam being revived? ‘Cuz CoCo’s count as equity when it comes to computing “Tier-1” Capital. Figured that out from the FT’s interactive graphics? Good on you!
So what happens when err… a bank’s totally safe, ‘AAA’ rated assets fall in value? CoCo’s convert into? worthless equity further diluting existing shareholders, causing equity value to fall, triggering "protection” money being robbed from us tax payers. And we can blame it all on the “derivatives” bogey-man.