By now you've seen the stories and heard the industry chatter about how the nonperforming loan market is humming along like a well-oiled Toyota, which might be an apt metaphor since the Japanese carmaker has a good reputation but its models keep breaking down.

As one NPL investor told me: "Some people get in, some get out, then they get back in. It's like whiplash."

But there's a method to all this madness. Wall Street firms the likes of Goldman Sachs, Morgan Stanley and Citicorp Securities are "in" as both buyers and sellers but they're not necessarily trading for their own accounts. And no, these firms aren't willing to say much about what they're up to, at least not on the record.

These investment bankers—their names besmirched by the subprime crisis—are running trading desks that deal in NPL residential loans. In other words, they're profiting from a mess that they had a hand in creating. (That's the beauty of being an investment banker.)

Be that as it may, what's changed over the past few months, I'm told, is that the "two-way" has picked up in the NPL market: there are enough active buyers and sellers out there that trading desks can flip a portfolio in a matter of weeks, if not days.

The end buyers, so far, appear to be dominated by hedge funds or current players in the business that have raised money through a special rights offering, that is, money from outside investors. The publicly traded PennyMac of California has no qualms admitting it's an active bidder. Also, it's well known that Arch Bay Capital of Irvine, Calif., is not only buying, but has already turned around and securitized some of its problem loans.

Another new entrant to the space is Interactive Mortgage Advisors of Denver, the veteran servicing/advisory business. IMA recently entered the market as a buyer of not only NPLs but scratch-and-dent loans, kickbacks and performing notes. "We raised about $100 million for our fund," said IMA managing member Tom Piercy. "I'd say so far we've spent about $40 million of that."

Piercy and others say that although billions in loans are being put out for bid, it appears that most of the sales—at least the ones that can be confirmed—are occurring in pool sizes of $50 million or less. "There are dozens upon dozens of investors for one to five properties (loans)," said Gordon Albrecht, executive vice president for FCI Lender Services, Anaheim Hills, Calif., a specialty servicer. "And there are bigger players out there taking down pools of 20 to 50 loans, but the big stuff is being traded below the radar. There are confidentiality agreements and major players involved. We don't know who the buyers are."

The sellers are obvious: Wall Street firms and any of the top 20 ranked lenders in the U.S., which are saddled with billions of dollars in problem loans that they themselves made or inherited when they bought ailing banks with (or without) government assistance. Bank of America is saddled with Countrywide's subprime, home equity, and subprime garbage, and JPMorgan Chase has the same headaches thanks to WaMu. Wells Fargo has Wachovia's "Pick-a-Pay" loans to wade through, and the list goes on and on.

And yet, the identity of the biggest buyers of NPLs remains, for the most part, a mystery, a point I touched on several columns ago. But maybe the "cone of silence" on the mega deals will end soon. The Federal Deposit Insurance Corp. is close to choosing a winning bidder for a $1 billion pool of troubled whole loans it inherited after the failure of AmTrust Bank of Cleveland. (The agency is also selling $22 billion of servicing rights from AmTrust. The receivables, unlike the whole loans, have low delinquencies.)

It stands to reason that when the FDIC unveils the winning bidder in a few weeks a name will be released to the public. After all, $1 billion is a lot of money—at least it used to be. And someone with deep pockets must be putting up substantial cash. In the world of finance secrets that large don't last forever.

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