Trading the untradable pays off

An online platform hopes to profit from the bank relief plan.

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By Telis Demos, writer-reporter

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SecondMarket's CEO Barry Silbert

(Fortune Magazine) -- Kevin O'Connor lost his job trading auction-rate securities last June when J.P. Morgan shuttered its desk. Within weeks he'd landed a gig trading those same assets alongside ex-traders of mortgage-backed securities, collateralized debt obligations (CDOs), and other toxic stuff.

His new employer? SecondMarket, a fast-growing online trading platform for illiquid assets. Since 2004 the company has been trading everything from bankruptcy claims to restricted stock to shares of Facebook. By creating an exchange for these typically opaque, hard-to-value assets, SecondMarket lets the trading determine their price.

Of course, no assets these days are as opaque and hard to value as the toxic assets clogging up banks' balance sheets. Now SecondMarket's 32-year-old CEO, Barry Silbert, has an ambitious new plan to create a transparent trading platform for the banks' junk.

Earlier this month SecondMarket began listing CDOs, unsecuritized loans, and nonagency mortgage-backed securities - the very assets the government is trying to coax investors into buying. On SecondMarket's platform, those assets are exposed to clear daylight: All the pieces of a CDO, for instance, are spelled out on a single web page, with default rates published alongside each tranche.

Silbert, a former adviser to distressed companies for investment bank Houlihan Lokey, started SecondMarket in 2004. In 2007, FirstMark Capital, the spun-off venture arm of Pequot Capital, bought a 25% stake for $3.8 million. Last year's revenues were $20 million, the company says.

So far, the toxic-trading markets are in their infancy; the bulk of SecondMarket's business is still trading the more benign assets like restricted stock. Its total inventory is tiny, just over $2 billion in securities out of a universe of $52 trillion of illiquid assets. And Silbert is competing with the prime brokerages of the major banks, which can trade those same assets for their big customers.

But Silbert thinks in the current climate customers will flock to the transparent model SecondMarket offers - and may see value in avoiding the banks that created the mess in the first place. "It takes a crisis to snap things into focus," he says.  To top of page

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