Press Room
Seymour Lowell was trapped in auction-rate securities from Nuveen Investments Inc., rendered untradable since 2008 and paying low interest rates. Then in early August, a company called SecondMarket Inc. found him a buyer, at 13% less than the $1.7 million he had paid.
Getting into auction-rate securities, mortgage-backed bonds and hedge funds was a lot easier for investors than getting out. Such investments became illiquid in the financial crisis, and can be almost impossible to unload through regular markets.
So SecondMarket and others like it are thriving, as a last-ditch alternative for investors like Mr. Lowell, a 78-year-old from West Palm Beach, Fla., who owns a maker of scientific instruments.
These firms match the investors and the firms' own rosters of buyers eager to snap up illiquid assets at bargain prices. Holders can get back anywhere from a few cents on the dollar for the most poisonous mortgage-backed securities to 90 cents for the best auction-rate securities.
SecondMarket, based in the old Standard Oil building overlooking Lower Manhattan's famed bronze bull statue, said it arranged $750 million in sales of unloved assets in 2009's first half. That equals its sales volume for all of last year. Typically, it holds auctions among investors culled from the 3,500 in its database. While SecondMarket is a broker-dealer, it doesn't take positions in any of these transactions.
These deals aren't easy to arrange. "Sometimes sellers get cold feet" because buyers want draconian discounts, said SecondMarket's 33-year-old chief executive, Barry Silbert, who launched the company in 2004. His firm charges handsomely to play matchmaker, from 2% to 4% of the sales price.
One seller of restricted stock, shares that can't be sold on the open market for several years, was reluctant to accept a price one-third below that of common shares of the same company. But he needed money to pay taxes. SecondMarket staffers spent hours talking him into it.
Occasionally, a buyer will back out, and SecondMarket will kick him off its network. The fear is that he was simply fishing for information about a seller.
Half of SecondMarket's business is in auction-rate securities, which are long-term debt instruments that are resold with new interest rates in periodic auctions held by banks. That market stalled when the banks bowed out of auctions, leaving investors stuck. Now, many banks, brokers and issuers are redeeming investors, but that sometimes is a gradual process.
Nuveen has redeemed 38% of its auction-rate securities' face value, and there is no announced schedule for the remainder. Mr. Lowell was willing to take the 13% haircut via SecondMarket so he could redeploy the money into more promising areas.
"My redemptions from Nuveen were really slow, and I'd be dead before I saw it all," he said.
Nuveen said it is redeeming the securities as quickly as it can refinance them.
The pool of illiquid-asset buyers is limited to wealthy people, with a minimum net worth of $1 million, and to institutions managing $100 million or more.
Among secondary-market players, SecondMarket serves as the intermediary for the broadest range of illiquid assets, from auction-rate securities to limited partnerships to private-company stock. It has developed a niche handling sales of shares in Facebook, a private company that has awarded stock to employees and consultants. SecondMarket transactions have a more retail flavor than its rivals; one-third of its sellers are individuals, with the average sale at $350,000.
