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The founder of Hildene Capital Management practically created the market for a distressed bank security that is winding down.
Brett Jefferson, Hildene Capital Management
Brett Jefferson can't complain, even if he's facing the end of an era. He came up with a distressed investing strategy that has earned double digits for his hedge fund, Hildene Capital Management in New York, over the past six-and-a-half years. Jefferson more or less single-handedly discovered the investment potential in collateralized debt obligations that contained trust-preferred securities issued by troubled small banks. When he started investing in these hybrid debt/equity instruments in 2008, they were poor performers that, as far as most investors and analysts could tell, were filled with securities of banks that might be on the verge of failing. But Hildene's managers pushed to collect on deferred payments and make the contents more transparent.
Issuance of so-called TruPS - it rhymes with "pups" - came to a virtual standstill with the financial crisis. Today the Dodd-Frank Wall Street Reform Act prevents new issuance because the banks can no longer include the funds originating from these securities as core capital on their balance sheets. However, after several years of uncertainty as to whether sponsoring institutions might have to unload their TruPS, in January the Federal Deposit Insurance Corporation, the SEC and three other federal agencies agreed to grandfather in bank TruPS issued before May 19, 2010. The clarification has boosted the value and liquidity of secondary market TruPS CDO's. And now an additional $1 billion worth of secondary market securities is becoming available. In mid-July the FDIC began auctioning TruPS CDO's that came into the deposit insurance agency's possession through its takeovers of more than 300 failed banks. For fund managers who have made money by buying...