Press Room
With the onslaught of illiquid assets— particularly displaced MBS and CDO bonds — the development of a market for these securities becomes essential as well as useful not only for the companies that profit from them, but more importantly, the economy as a whole.
SecondMarket, which has its roots creating markets for buying and selling restricted securities, is expanding its reach to cover the trading and analysis of MBS and CDOs, and eventually moving into whole loans, CMBS and ABS.
“It’s not only important for us as a business opportunity, but it’s really what is needed by way of what’s happening in the economy,” said Jeremy Smith, chief strategy officer at the firm. “You need a marketplace to get things restarted because it’s very difficult, if not impossible, to value these securities except through competition and collaboration. We are trying to bring the power of the marketplace to get things moving again. It would take the smart money people paying the right prices.”
SecondMarket, which was founded in 2004, started as a marketplace for buying and trading restricted securities — restricted stocks, warrants, convertibles— which were assets that were difficult to trade but not hard to price because there was an available public price that the security’s discount could be based on.
However, the firm’s business really took off in February 2008 when the auction rate securities market collapsed and investment banks stopped making a market for these bonds. “People thought they had a cash equivalent, but it turned out they were often times holding a 10- or 15-year note,” Smith said. Because of the need in this market for liquidity, auction rates became SecondMarket’s biggest source of business.
Turning to Securitized Products
Since MBS and CDO illiquid bonds are trying to find a space to trade, SecondMarket is extending its expertise to these areas.
“There’s a similar pattern and cadence to starting up markets and once you’ve figured out how to do it, you can apply that template to other marketplaces,” Smith said.
In this vein, SecondMarket has hired securitization professionals to head up this expansion effort.
Richard Gugliada, formerly head of CDOs at Standard & Poor’s, recently joined the company as a consultant and is in charge of building the firm’s securitized products teams. The firm also hired Michael Anderson, who was previously at DBRS, to be part of its structured finance efforts.
“With the breakdown of secondary mortgage trading on Wall Street, two things have happened,” Gugliada explained. First, the dealers who underwrite the deals might not exist anymore, and many of these investment bankers have established their owns shops “crossing bonds.”
“But from the investor’s perspective, nothing major has changed in terms of the way they sell bonds, they still rely on some broker dealer type to find buyers,” he said. However, no one has the capital deep enough to make a firm bid, so the smaller shops are merely crossing bonds and not buying inventory like they used to.
According to Gugliada, SecondMarket is offering investors an alternative by providing them with an “exchange-like environment” where they could list their securities and have established buyers for them. “We are inviting all of the shops that cross bonds to put up their listings and buy and sell through us,” Gugliada said.
