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While some investment bankers are starting to think about the introduction of second-generation "Percs" products, one Street veteran is warning that the market's inefficient pricing of outstanding Percs issues should be setting off alarm bells instead.
Emmett Harty, president of Parallax Group, a Westport, CT-based equity derivatives boutique, is particularly concerned about aftermarket trading in the General Motors Corp. issue. "The investment community doesn't really understand Percs, how to trade them," he says. "Issuers have to know thcy will be priced and traded correctly."
Harty says the GM Percs are substantially overvalued, and that many of the original institutional investors from the June 1991 offering have since resold the securities to retail investors. Harty claims they have been sold the Percs based on their current yield, without a full appreciation of the total-return implications of the securities' mandatory conversion feature. Thus, the Street risks tarnishing the image of an important new product at a critical time in its young life.
"Before you can get to too many derivations, you need improved efficiency," Harty says. "The threat is GM--the thing out there that's a red flag is that GM is mispriced."
Harty has a unique perspective on the subject, since he managed Alex. Brown & Sons' offerings...