Lehman Brothers is considering moving both its par and distressed trading operations to the public side of the wall, following a trend that has many players merging their bank and bond teams. The move comes as the market works to accommodate crossover investors and appease interested regulators.
"As the [Securities and Exchange Commission] has come in and regulated dealers involved, they are looking very closely at loans and more and more arrangers are looking at how to best position their business, to protect it and make sure people are doing the right thing and don't inadvertently do anything wrong," said one banker. "The easiest, safest way to do that is to put the loan sales and trading force on the public side of the wall and make sure to protect them through bifurcated meetings, bifurcated calls."
IntraLinks is offering an enhancement to its service to separate public and private information for loan investors. Buysiders will be given the option to select their position on the transaction as "public" or "private" and thus be allowed access appropriate for their status, thus limiting the risk of accidental exposure to non-public information.
Investors are starting to see the crackdown on private information, demonstrated during two very separate public and private sessions of the bank meetings for The Neiman Marcus Group and Movie Gallery last week. "Normally they have a public meeting in person and over the phone, and then take roughly a two minute break, and it's the honor system," said one hedge fund manager. "[Then they say] please hang up or leave the room [if public]. That's the way it normally occurs." One portfolio manager agreed and said, "It is generally on the honor system to drop off when the private side discussions [begin], but now they make you redial in and identify who you are so they know that you signed up to be private."
At the Neiman Marcus meeting last Tuesday, the public meeting was held in the morning, followed by a break for a tour of Bergdorf Goodman and then a private investor call was held in the afternoon. During the Movie Gallery meeting last Thursday, a public session was held from 10-11 am, then there was a 15 minute break and then the private call was held from about 11:15 am to 12 pm. In order to get onto the private call, investors needed to call into a different number and identify who they were, where they work.
"There certainly has been more scrutiny on public/private issues," said another banker. "The position underwriters have taken was, it's up to investors themselves to police the public/private issues and if [a group is] public and seeing private information to restrict themselves to do public securities...but with all the scrutiny around the business, the sentiment is shifting in favor of more activity to help monitor the situation."
Regardless of where firms are seating their traders, everyone agrees the issue is not going away. "This is obviously going to be an evolving issue and it is clear that no one at this point has the correct answer, but there has been movement toward greater [separation] and it does not surprise me in this heightened time of regulation," said the hedge fund manager.
