From an operations desk that extends from one end of the room to the other, traders at Bear, Stearns & Co. buy and sell billions of dollars worth of mortgage securities each day.
The trading floor and its 50 workers are the most visible evidence that the New York investment house is serious about mortgage securities. "We've definitely made our commitment to the products," said Jeffrey A. Mayer, senior managing director at Bear Stearns.
And who is buying these products? In offering a snapshot of today's investor, Mr. Mayer said buyers have become much more savvy about the types of mortgage securities they want - simpler, less risky products.
While the company still makes markets in riskier types of mortgage securities, Mr. Mayer said, "we've made more of a commitment to the more generic and commodity part of the business."
The year started well, he said, and the momentum is continuing. "There's a constant flow of new deals," he said. Trading volume "has been high, and customer participation has been broad and deep."
Mr. Mayer speaks with authority. From his vantage point as head of mortgage operations, he has a clear view of what kinds of mortgage securities institutional investors are buying.
Many buyers - banks, insurance companies, and mutual funds - are still chastened by the rout in 1994, he said. Back then, complex derivative products were popular. And "there wasn't an adequate understanding of a lot of the risks in the securities that investors held," he said.
Since then, investors have wised up. "There's been an incredible amount of intelligence and sophistication brought to the mortgage market," Mr. Mayer said. "They are more adept at hedging risk."
In 1994, when interest rates shot up and caused the value of complex mortgage derivatives to plummet, many investment banks retreated. Bear Stearns rode the tide, largely by selling more lower-risk, plain-vanilla securities. The strategy fits well with the preferences of today's investor - a little gun-shy but aware that mortgages still offer good investment opportunities.
"There's been a movement by customers to more liquidity and simplicity," Mr. Mayer said. "There are fewer difficult trades."