Wall Street firm part of the solution, not the problem

3/17/09
secondmarket
By Garett Sloane

Wall Street firm part of the solution, not the problem

Photo credit: Urbanite

Barry Silbert, CEO of Second Market, meets with Kevin O'Connor, left,

and Brendan O'Connor at their office in lower Manhattan. (RJ Mickelson/amNY)

By Garett Sloane

Wall Street is being vilified for leading the world to financial ruin, but from those same doomed streets one company hopes to play the savior.

On March 31, the Wall Street company SecondMarket is set to open the trading floodgates on “toxic assets” that are dragging down banks and their ability to lend.

“We really are part of the solution,” said Barry Silbert, CEO of SecondMarket. “The stuff that is clogging up our system right now, it’s pretty common for a commentator or an expert to say, ‘If only a market existed.’ And from that perspective we are becoming [that market], and so we are going to help provide clarity on pricing. We are going to help unclog the system.”The “stuff” in the system is the toxic assets — or mortgage-backed securities — that have proved hard to price and sell, partly because there is no transparent market to trade them. Uncle Sam owns plenty of the assets thanks to the financial bailout.

The company has met with officials in Washington about trading the assets, and buyers and sellers already are lining up, according to Jeremy Smith, the chief strategy officer.

Creating a marketplace for complex-financial instruments is nothing new at SecondMarket. It’s done the same for seven types of “illiquid assets.”

Illiquid assets are anything not easily convertible into cash. So they can be stock in a private company, which SecondMarket already has a market for, or they could be an antique collection.

If a seller had an antique collection, he might go to a site such as eBay to find a buyer. SecondMarket facilitates the trading of more exotic financial instruments. Like eBay, SecondMarket is an impartial third-party.

Until now, there has not been a similar venue for mortgage-backed securities to find their fair market value. The owners of the assets, the government or major financial institutions, don’t know how to price them accurately.

Starting at the end of the month, SecondMarket will also unite buyers and sellers for CDOs, collateralized debt obligations, another pernicious financial instrument.

Getting the “toxic assets” flowing off the banks’ books and into investors’ hands is a major component of the Obama administration’s plans, which are still being worked out.

SecondMarket expects a boost in trading on the site once the mortgage-backed securities — including commercial mortgage-backed securities — and CDO markets are fully open. Smith sees the potential for tenfold growth in its markets, which have already doubled in volume to $1 billion since August. The company went from $1 million in revenue when it opened in 2005 to $20 million last year, Silbert said. He said the boom is only beginning.

“The top story of the day is illiquidity, toxic assets and things like that, and as the largest marketplace for illiquid assets it would be embarrassing if we were not seeing the growth that we’re seeing,” Silbert said.
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Wall Street firm part of the solution, not the problem

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