When Lee Hayes, Dick Stack and John Dwyer called some 75 U.S. investors -– institutional accounts that include mutual funds and insurers –- early this year they were pleasantly surprised. All of these market players were ready to do business with their little-known brokerage firm, Northeast Securities, which just started its big push into fixed income.

“They are covered by a lot of people but covered by few,” meaning that investors were not able to readily find a market for securities they held, said Hayes, a longtime veteran of the bond market who spent 13 years in institutional sales at Salomon Brothers and, later, rebuilt Lehman Brothers’ municipal bond business for Dick Fuld.

The positive response from these investors means small firms like Northeast may have a shot at making inroads to a market that has in recent decades been dominated by bulge-bracket firms. Much of that is because the bulge brackets and many commercial banks simply cannot use their balance sheets and take on massive inventories of bonds. So, they are not as readily making markets in a wide range of debt securities.


“There was a monumental destruction of Wall Street’s infrastructure as we have come to know it over the last several decades,” says Robert Bonelli, president of New York-based Northeast, who sees this as a “once-in-a-lifetime opportunity” to bring in seasoned professionals. “The future of Wall Street is its past,” Bonelli said, referring to the re-emergence of smaller firms that are partnerships of dealmakers. “You have talent — and I am not ashamed to say this — that would not have tripped over Northeast in the past that are now actually part of us.”


Northeast's roots are in equities. The firm opened its doors in 1989 and was largely a broker for stocks. It was, as Bonnelli recalls, a single-office retail brokerage firm and was run that way until 2001. The firm added to its retail brokerage business, built its presence among institutional investors, and added investment banking and asset management. “The roots of the firm were primarily retail brokerage. Primarily equity trades. Some fixed income, but retail, totally retail,” said Bonelli.

Now though, it has brought on professionals — each with decades of experience — to build a presence in fixed income, specifically municipal bonds, corporate debt and mortgage debt.
Northeast is working with The Saxon Group, a New York-based recruitment firm, to build up its fixed income team.


Specifically, the company wants to bring on five salesmen for its muni business and then it will bring on 10 public finance bankers. Hayes and Dwyer, also an old hand in the muni business who previously worked at Lehman and Dillon Read, as well as Stack (formerly with Lehman, where he was a muni trader and ran the firm’s prop desk from 2003 to 2008), are heading the expansion of the muni effort.

Last week, Northeast hired Kurt van Kuller as a salesman for its municipal team. Previously, Kuller was at Merrill Lynch, where he built and managed its muni research.

At the same time, Northeast wants to hire three corporate bond traders specializing in high-grade debt and two mortgage bond traders. The firm’s wish list includes 10 sales professionals to handle corporate debt and six salesmen to cover mortgage bonds. This taxable fixed income side of the business is being built out by James Cahill, who has previously been a bond salesman with Salomon and Lehman. Most recently, he was involved with building up the fixed income business at KBW.

Much of the firm’s business today is oriented to retail. Its president estimates that 65% of the brokers business is with retail clients and 35% is institutional. He hopes to change that by next year. “By the end of 2010 I would see us being 70% institutional and 30% retail,” says Bonnelli.
Interestingly, some Northeast clients may be surprised by what Cahill, Hayes and Dwyer have in mind. As they see it, the relationship between institutional investors and dealer firms making markets has become adversarial over the last decade.

In making markets for large institutions like pension funds and state funds, Cahill and others at Northeast hope to “help investors understand the value of their securities” and if Northeast gets a better-than-expected price for a bond some of the profit will be passed on to investors. “At Salomon we were trained that if you make too much money, you give some back” to the investor, says Cahill. “When a customer assigns us to sell a bond if we get a better price than we indicated we’ll pass some back.”

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