But banks failed all over the country in the 2008 credit crunch, throwing shade on Siegel’s original theory about regional diversification. Larry Cordell, a vice president at the Federal Reserve Bank of Philadelphia, said that’s because too many banks’ portfolios were concentrated in real estate and mortgages. They weren’t diversified enough, he said. The market for TruPS CDO collapsed. Some investors are still waiting to be repaid.

Today’s CDOs are a better bet because the banks have learned from the credit crunch. They’re stronger, with more capital and better regulation, Siegel said in an interview.

Because of tougher capital requirements and tighter oversight in the wake of the 2008 crisis, widespread bank defaults would seem less likely, said Ricardo Diaz, head of fixed income for Atlanta-based investment manager FIG Partners.

TruPS issuance has fallen to zero while publicly traded banks sold $12.3 billion of sub-debt, as it’s called, in 2013, about four times what they issued between 2009 and 2012, according to SNL Financial.

Brett Jefferson, president of Hildene Capital Management in Stamford, Connecticut, said that sub-debt CDOs are simply a retooling of TruPS CDOs.

“It’s a flavor of the old deals,” Siegel said.


TARP Exits


The popularity of sub-debt among smaller banks has been sparked partly by the U.S. Treasury Department’s Small Business Lending Fund. Starting next year, banks remaining in the program will see their rates jump to 9 percent from a borrowing rate of as low as an initial 1 percent. The fund loaned $2.7 billion to 137 community banks, which were supposed to use the money to increase their small business lending. Instead, many of the participants used it to pay off debt from the Troubled Asset Relief Program, according to TARP’s special inspector general.

The Fed is also doing its part to make sub-debt attractive to banks. Aside from low interest rates, the central bank has said sub-debt can be categorized as regulatory capital, the cash cushion all banks need to keep to stay in compliance post-crisis regulations. And the interest is tax deductible for the smallest banks.

Another sub-debt CDO is being put together by Emanuel “Manny” Friedman, co-founder and chief executive officer of EJF Capital in Virginia.