Manhattan Bancorp in El Segundo, Calif., is trying to revive the mortgage conduit business model practiced several years ago by Wall Street firms.
The parent of the two-year-old, $92 million-asset Bank of Manhattan said this week that it had agreed to invest in a new mortgage-backed securities business, BOM Capital LLC, which will be led by Greg Jacobson, a former senior vice president at Countrywide Financial Corp.'s securities unit. The outfit will start by trading mortgage bonds and whole loans, but eventually it plans to expand into origination.
That was the path followed by the mortgage-backed securities desks at Lehman Brothers, Bear Stearns Cos., Morgan Stanley and other firms that eventually were felled or bruised by mortgage-related losses.
But Jeff Watson, Manhattan Bancorp's president and chief executive, said that initially BOM Capital will not take positions in mortgage-backed paper; instead, it will earn fee income by matching sellers and buyers.
"There's such a disconnect in the market right now for MBS trading, and this gives us a great source of fee income in an environment of margin compression," he said. "We're going to engage in riskless trading by putting the buyers and sellers of different bonds together."
In the long term, Watson said, Manhattan Bancorp sees a bigger opportunity in a market that is much less crowded than it was in the go-go years in the middle of this decade.
BOM Capital could eventually write jumbo loans, he said. "With the fallout of mortgages and with Countrywide and Washington Mutual no longer in jumbo origination, this is an opportunity for the bank to deploy our capital."
David Olson, a managing director at Access Mortgage Research and Consulting Inc. in Columbia, Md., said the plan makes sense.
"If you can get in when everyone else is out, it could be great timing," Olson said. "Obviously, there's not enough capital in the industry, and if you're not stuck with the past dealing with foreclosures, lenders can make big profits now on the origination side."
Watson said BOM Capital plans to open an office in Calabasas, Calif., where Countrywide was based. Jacobson said the business is amassing roughly a dozen bond-trading "all stars," most of whom left Countrywide last year after it sold itself to Bank of America Corp.
Despite the scant issuance of nonagency securities, Jacobson said current bondholders still need a trading partner.
"You don't have to be Goldman Sachs or Morgan Stanley to buy and sell these securities, because it's all based on existing relationships," he said. "There are pieces of securitizations being resold in the secondary market."
Many money managers are facing redemption requests from their investors and need to sell bonds that have been downgraded, so they have turned to traders they know, Jacobson said. "The idea is that for as long as there's a lack of new issue business, there will be a secondary business, and we expect the securitization market will return eventually in some form."
Manhattan Bancorp did not say when the investment would close. It would pay $790,000 for a 70% stake in BOM Capital; Bodi Advisors Inc., a firm founded by Jacobson, would own the other 30%.
Bank of Manhattan now has 22 employees. It raised $25 million as start-up in August 2007, and it raised $15 million of fresh capital in December from a fund managed by Edward Carpenter, the chairman of Carpenter & Co., an Irvine, Calif., investment bank that specializes in start-up banks.
Watson was an executive vice president and chief operating officer at 1st Century Bank in Century City, where he worked for the turnaround artist Richard Cupp. Before that he was chief administrative officer at Commercial Capital Bancorp in Irvine.
Manhattan Bancorp is evaluating whether to repay $1.7 million it received from the Troubled Asset Relief Program in December, Watson said.
"We don't know what conditions they are going to impose, and being in an enviable capital position and paying 5% for money we don't need is expensive for us," he said.
