COLUMN-Not so coo-coo for CoCos: Agnes T. Crane

-- Agnes T. Crane is a Reuters columnist. The views expressed are her own --

By Agnes T. Crane

NEW YORK Nov 12 (Reuters) - Regulators love them and investment banks are busy trying to craft what would be the first significant investment product since the credit crisis, but bond investors are right to be skeptical about contingent capital, affectionately known as CoCos.

This untested convertible debt would leave investors holding bank equity precisely when the financial system is under the most stress. What's there not to like?

When Bank of America-Merrill Lynch said this week it would include the ultimate bank buffer securities in their bond indexes, after saying just last week that it wouldn't, bond investors revolted.

Britain has been leading this debate so far. It was the Association of British Insurers who complained about BofA-Merrill's decision to include such securities in the indexes.

Lloyds (LLOY.L), meanwhile, is planning to convert old debt to CoCos as part of its broader fundraising effort to regain its independence.

Regulators on this side of the Atlantic are also keen for U.S. banks to embrace such securities to minimize, if not eliminate, the burden on taxpayers should the financial system ever hit the skids again.

The flip-flopping by Bank of America-Merrill Lynch, though, illustrates that CoCos may look good on the drawing board, but finding a place in the market for these hybrid securities is something else entirely.

Such capital will be expensive for banks, especially when compared with the favorable financing enjoyed for much of this year through a government guarantee program. But it becomes cost prohibitive if there's a dearth of investors.

Keefe, Bruyette & Woods analysts estimate that the 19 financial institutions deemed systemically significant would have to raise as much as $303 billion in contingent capital.

It should also serve as a red flag when attempts to even classify such securities are so difficult. After all, "simplicity" became a rallying cry when the credit crisis exposed the fallibility of placing too much faith in highly-engineered securities and derivatives designed to protect the financial system.

U.S. regulators who are talking with Wall Street executives bringing CoCos to these shores should go back to the drawing board. But this time, bring investors along to design something that doesn't need bells and whistles to work. -- For previous columns, Reuters customers can click on [CRANE/] (Editing by Martin Langfield)