Mortgage Securities Market Fragments : Rivals End Dominance of 2 Giant Investment Banking Firms
After years of domination by two giant Wall Street investment banking firms, the $700-billion U.S. mortgage-backed securities market is witnessing a significant redistribution of market share, industry sources say.
Salomon Bros. and First Boston Inc., which three years ago collectively handled 60% of the mortgage business, now are responsible for just 30% of the $4 billion to $5 billion worth of mortgage securities traded each day.
A major source of financing for homes, mortgage-backed securities are financial instruments secured by a pool of home mortgages and issued by such major agencies as the Federal Home Loan Mortgage Corp., Federal National Mortgage Assn. and the Government National Mortgage Assn.
These agencies take home loans originated by banks, savings and loan associations and others and package them as bonds, for which investment banks create a market.
Salomon and First Boston were well-suited for the business, since their strong backgrounds in trading and close ties to big investors enabled them to set up markets to trade the securities.
But dealers say the two giants have simply lost their dominance to aggressive competitors such as Bear, Stearns & Co. Others who have taken a larger share of the pie are Prudential-Bache Capital Funding, Drexel Burnham Lambert, Goldman Sachs, Merrill Lynch and Morgan Stanley. Some of the new entrants to the business are seen as leaner operators.
Needs Many Support People
“First Boston’s overhead was too high,” said the firm’s former head mortgage trader, Howard Diamond.
He said the mortgage securities market “is more complex than other bond markets and a lot of support people are needed to run a major operation.” Diamond added that First Boston is just not as committed as it once was.
However, First Boston’s new head mortgage market trader, Ken Weiss, said the firm was not reducing its market participation. He added that Salomon Bros. appears to be less active since it has gone through a restructuring that appears to emphasize other businesses, which he sees as an opportunity for First Boston to pick up ground.
A spokesman for Salomon Bros., which has been hit by internal turmoil and takeover rumors, conceded that the firm has become less active in the mortgage market. He said that over the past few months, Salomon has lost at least six senior mortgage-backed securities professionals and numerous support personnel.
Senior executives who recently left Salomon include Woody Fisher, director of Salomon’s mortgage office in London, and Barry Turcanus, head of the Boston office.
Others are William Powers, who market sources have called one of Salomon’s top salesmen for the West Coast and who subsequently joined Bear Stearns, and Ronald Depasqual, who handled a number of the firm’s innovative mortgage products.
Two top officials who left Salomon Bros.’ mortgage securities operation at the end of 1987 were Lewis Ranieri, who is opening his own firm, and Michael Mortara, now a partner at Goldman Sachs.
