For a decade after its founding in the early 1990s, GMAC-RFC Securities mostly contented itself with playing handmaiden to GMAC Residential Funding Corp., dutifully handling the distribution of regular home equity securitizations and eschewing the pursuit of other underwriting business. Not a bad gig, considering RFC is one of the most prolific issuers in the market.
Apparently, however, the firm is hungry for more.
Since last fall, RFC Securities has co-managed two CBASS transactions and three Countrywide issues, totaling nearly $3 billion. And GMAC-RFC executives acknowledge that RFC Securities' role going forward will be much more strategic for GMAC-RFC's total global business - even if that means doing business with the conduit's competitors. "Our role is to take our 11 years of experience and leverage that for all of RFC's business," said Rod McGinniss, managing director at RFC Securities. "Our primary goal in the market is to enhance RFC's business globally."
Addressing the question of whether conflicts of interests might crop up as RFC Securities pursues its new strategy, McGinniss pointed out that the reality of today's global financial marketplace is that "your partners are your competitors." Residential Funding might buy whole loans from Chase Mortgage, and subsequently have a competing securitization offering. He pointed out that RFC Securities' strategy is no different than that of many Section 20s of big commercial banks that handle their parent bank's securitizations and pursue other underwriting business.
Despite these maneuverings, the special relationship between RFC and the broker-dealer is not on the rocks, executives said. McGinniss stated that RFC Securities will continue involvement in RFC transactions and will make a secondary market for the bonds. In fact, he argued that co-managing other deals and developing deeper and broader relationships with investors will help the broker/dealer serve RFC better. "The more opportunities we have to distribute ABS, the more significant a player we become, and that allows us to provide greater liquidity for RFC," McGinniss said. "It's a full circle thing. The more we do away from the firm, the more we can do with the firm."
Eric Scholtz, executive vice president at GMAC-RFC Capital Markets, concurred that the securities arm's role remains critical to RFC's strategy since it facilitates direct communication with investors. "We have a good message to sell, and that can be done best through our broker dealer. Wall Street does a good job, but we're presented through their eyes.... Investors drive the equation and you need a direct connection to understand what they want, what their preferences are."
Despite RFC Securities' critical role, Residential Funding is also looking to expand outside relationships and tap into Wall Street's expertise. It relies on a regular group of banks to handle the distribution of ABS bonds, including Salomon Smith Barney, JPMorgan, Banc of America Securities, Bear Stearns, Deutsche Bank Securities, and Credit Suisse First Boston. Beyond distribution, these banks provide analysis, research, liquidity, and advise RFC strategically. "We have a small number of deep relationships that are open about business strategy, and we hope to work together for the long term," Scholtz said.
Going forward, RFC Securities hopes to add to its book of underwriting business; but to move "to the next level," McGinniss said, the broker/dealer will need to become more adept at "marrying financing facilities with underwriting," something he hopes to have in place in the 2003-2004 time frame. While he doesn't see RFC Securities becoming an underwriting presence as big as the established Wall Street shops, he does plan to become "a substantial net income contributor" to the corporate parent. "People inside the company are on board with this," he said.