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.Banks and S&Ls had different charters.The S&L depository insurance fund wascalled the Federal Savings and Loan Insurance Corporation (FSLIC).Banks, by design,made many types of loans, including commercial real estate and business loans.Up untilthe Garn St Germain Act of 1982, S&Ls did one thing and one thing only: make homemortgages.After Congress realized what a disaster it had made of the industry with thatbill, it reregulated all S&Ls, forcing them to put a majority of their assets into homemortgages.This happened in 1989 through the passage of the Financial InstitutionsReform Recovery and Enforcement Act, signed into law by George H.W.Bush. 138 chai n of b l ameof owning an office building in a hot property market was this: Oncethe lease expired, the landlord or building owner could jack up therent, increasing the cash flow.Increased cash flow from rents meant thata property could support an even larger mortgage.Billings and his partners at FBR were among the fi rst to real-ize that with all the cash fl ow (rents) that offi ce buildings, hotels, andthe like were throwing off, commercial properties were perfect vehi-cles for REITs.In 1994, FBR, with Billings as its point man, raised$350 million for Prime Retail Corporation, a Baltimore-based shop-ping center owner.The REIT business quickly became a major part ofthe young investment banking firm s menu of activities.The firm wasnow 200 employees strong.Manny, Eric, and Russ, as they were knownto their workers, were in their early to late 40s.Thanks to commercialproperty REITs, the young fi rm had gained a reputation for being aninnovative investment banking boutique that didn t need a New Yorkaddress to thrive.It attracted young deal makers and fostered a culturewhere the dress code was ultracasual jeans and shorts even completewith a company health club, sauna, and masseuse.The average age of itsemployees was under 30.Employee turnover was light.Friedman, meanwhile, began focusing his attention on what WallStreet liked to call specialized finance companies, a code phrase forresidential subprime lenders.Prior to the Russian debt crisis of late1998, which also hammered many publicly traded subprime lenders,FBR took a handful of mortgage lenders public (including Long BeachFinancial, which had been spun off by Roland Arnall).Accordingto one senior Long Beach executive, FBR s point man on the IPOwas Rock Tonkel, a former top regulator from the Office of ThriftSupervision (OTS) who had left the world of government agenciesbehind in 1994 and joined FBR. When it came to REITs, Rock wascompletely on board, said one former FBR manager.Tonkel, a heavyset man, had actually met Friedman while he wasstill a regulator at OTS.One of his assignments was Glendale Federal.Another was Dime Savings.Tonkel tried to push Long Beach presidentJack Mayesh to convert into a publicly traded REIT, but Arnall s right-hand man wasn t buying into the idea, primarily because mortgage-lending REITs had absolutely no track record whatsoever.Mayeshknew Billings and admired his capabilities as a salesman but ignored The Holy Roller of REITs 139Tonkel s suggestions on becoming a REIT.Mayesh went for thestandard C corporation structure, tax breaks notwithstanding.* * *The downturn in the subprime market of the 1990s lasted roughly twoyears.By cutting short-term rates dramatically, the Federal Reserveunder Alan Greenspan helped to prop up a struggling U.S.economythat wasn t quite in a recession but surely wasn t booming and addingjobs fast enough to please both the Fed and the Bush White House.In2003 when 30-year A paper loans could be had for 5 percent withjust about no points paid up front (for a consumer with good credit),residential originations by lenders of all different stripes (banks, S&Ls,nonbanks, and credit unions) reached a record $3.9 trillion.Subprimeoriginations, for the first time ever, topped almost $400 billion a yearor 10 percent of all home loans funded in the United States, also arecord.Suddenly, a business that had looked doomed just five yearsearlier appeared to have a bright future.After all, if as a nonbank youcouldn t make money by borrowing money from Wall Street at, say,3 percent and lending it out to consumers with bad credit at 8 percent,something was defi nitely wrong.In between the 3 percent and the8 percent was a total of 500 basis points (5 percent) of gross profit, andno matter how bad some of these borrowers were, there was plenty ofcushion to buffet delinquencies.Thanks to their knowledge of how S&Ls (and therefore mortgages)worked, Friedman and Billings as well as Rock Tonkel recognized thepotential and began pushing the REIT concept hard to the ownersof subprime lending companies.(However, they were now doing sowithout the services of Ramsey, who had resigned from the firm tostart a venture capital fund that specialized in Washington-area technol-ogy, telecommunications, and media firms.6) Even though the REITmarket for mortgage lenders did not exist after the 1998 crash, FBRhad established itself as the premier investment banking fi rm when itcame to using commercial property REITs to buy buildings, raising6Ramsey left the firm but remained as a director with a 12 percent share.FBR did notchange its name. 140 chai n of b l amebillions of dollars for investors through either IPOs or secondary offer-ings of stock.* * *When it came to mortgage REITs, Billings according to both mort-gage executives who listened to his pitches and former employees wasa true believer.One former FBR manager remembers hearing Billingssinging the praises of mortgage REITs on several occasions. Ericwould argue for REITs until he was blue in the face with veins pop-ping out of his head. In one company strategy session he rememberedBillings saying, I will REIT-up commercial, I will REIT-up stadiums,I will REIT-up telephone towers. Pat Flood clearly remembered Billings zeal. Eric would tell youthat REITs made sense.He was adamant, convinced that this was thebest way for mortgage bankers to get out of the cellar. The cellar referred to the second-class citizen status of nonbankmortgage lenders subprime and prime alike.Investment bankingfi rms like Merrill Lynch, Lehman Brothers, and Bear Stearns wouldtake nonbank lenders public from time to time, but few managingdirectors on Wall Street who worked at these firms seriously believedthat these nonbanks had much in the way of long-term viability.Theidea was to take nonbanks public and then eventually sell them to fed-erally insured banks or S&Ls, institutions that took deposits from theGeorge Bailey crowd in Bedford Falls [ Pobierz całość w formacie PDF ]
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.Banks and S&Ls had different charters.The S&L depository insurance fund wascalled the Federal Savings and Loan Insurance Corporation (FSLIC).Banks, by design,made many types of loans, including commercial real estate and business loans.Up untilthe Garn St Germain Act of 1982, S&Ls did one thing and one thing only: make homemortgages.After Congress realized what a disaster it had made of the industry with thatbill, it reregulated all S&Ls, forcing them to put a majority of their assets into homemortgages.This happened in 1989 through the passage of the Financial InstitutionsReform Recovery and Enforcement Act, signed into law by George H.W.Bush. 138 chai n of b l ameof owning an office building in a hot property market was this: Oncethe lease expired, the landlord or building owner could jack up therent, increasing the cash flow.Increased cash flow from rents meant thata property could support an even larger mortgage.Billings and his partners at FBR were among the fi rst to real-ize that with all the cash fl ow (rents) that offi ce buildings, hotels, andthe like were throwing off, commercial properties were perfect vehi-cles for REITs.In 1994, FBR, with Billings as its point man, raised$350 million for Prime Retail Corporation, a Baltimore-based shop-ping center owner.The REIT business quickly became a major part ofthe young investment banking firm s menu of activities.The firm wasnow 200 employees strong.Manny, Eric, and Russ, as they were knownto their workers, were in their early to late 40s.Thanks to commercialproperty REITs, the young fi rm had gained a reputation for being aninnovative investment banking boutique that didn t need a New Yorkaddress to thrive.It attracted young deal makers and fostered a culturewhere the dress code was ultracasual jeans and shorts even completewith a company health club, sauna, and masseuse.The average age of itsemployees was under 30.Employee turnover was light.Friedman, meanwhile, began focusing his attention on what WallStreet liked to call specialized finance companies, a code phrase forresidential subprime lenders.Prior to the Russian debt crisis of late1998, which also hammered many publicly traded subprime lenders,FBR took a handful of mortgage lenders public (including Long BeachFinancial, which had been spun off by Roland Arnall).Accordingto one senior Long Beach executive, FBR s point man on the IPOwas Rock Tonkel, a former top regulator from the Office of ThriftSupervision (OTS) who had left the world of government agenciesbehind in 1994 and joined FBR. When it came to REITs, Rock wascompletely on board, said one former FBR manager.Tonkel, a heavyset man, had actually met Friedman while he wasstill a regulator at OTS.One of his assignments was Glendale Federal.Another was Dime Savings.Tonkel tried to push Long Beach presidentJack Mayesh to convert into a publicly traded REIT, but Arnall s right-hand man wasn t buying into the idea, primarily because mortgage-lending REITs had absolutely no track record whatsoever.Mayeshknew Billings and admired his capabilities as a salesman but ignored The Holy Roller of REITs 139Tonkel s suggestions on becoming a REIT.Mayesh went for thestandard C corporation structure, tax breaks notwithstanding.* * *The downturn in the subprime market of the 1990s lasted roughly twoyears.By cutting short-term rates dramatically, the Federal Reserveunder Alan Greenspan helped to prop up a struggling U.S.economythat wasn t quite in a recession but surely wasn t booming and addingjobs fast enough to please both the Fed and the Bush White House.In2003 when 30-year A paper loans could be had for 5 percent withjust about no points paid up front (for a consumer with good credit),residential originations by lenders of all different stripes (banks, S&Ls,nonbanks, and credit unions) reached a record $3.9 trillion.Subprimeoriginations, for the first time ever, topped almost $400 billion a yearor 10 percent of all home loans funded in the United States, also arecord.Suddenly, a business that had looked doomed just five yearsearlier appeared to have a bright future.After all, if as a nonbank youcouldn t make money by borrowing money from Wall Street at, say,3 percent and lending it out to consumers with bad credit at 8 percent,something was defi nitely wrong.In between the 3 percent and the8 percent was a total of 500 basis points (5 percent) of gross profit, andno matter how bad some of these borrowers were, there was plenty ofcushion to buffet delinquencies.Thanks to their knowledge of how S&Ls (and therefore mortgages)worked, Friedman and Billings as well as Rock Tonkel recognized thepotential and began pushing the REIT concept hard to the ownersof subprime lending companies.(However, they were now doing sowithout the services of Ramsey, who had resigned from the firm tostart a venture capital fund that specialized in Washington-area technol-ogy, telecommunications, and media firms.6) Even though the REITmarket for mortgage lenders did not exist after the 1998 crash, FBRhad established itself as the premier investment banking fi rm when itcame to using commercial property REITs to buy buildings, raising6Ramsey left the firm but remained as a director with a 12 percent share.FBR did notchange its name. 140 chai n of b l amebillions of dollars for investors through either IPOs or secondary offer-ings of stock.* * *When it came to mortgage REITs, Billings according to both mort-gage executives who listened to his pitches and former employees wasa true believer.One former FBR manager remembers hearing Billingssinging the praises of mortgage REITs on several occasions. Ericwould argue for REITs until he was blue in the face with veins pop-ping out of his head. In one company strategy session he rememberedBillings saying, I will REIT-up commercial, I will REIT-up stadiums,I will REIT-up telephone towers. Pat Flood clearly remembered Billings zeal. Eric would tell youthat REITs made sense.He was adamant, convinced that this was thebest way for mortgage bankers to get out of the cellar. The cellar referred to the second-class citizen status of nonbankmortgage lenders subprime and prime alike.Investment bankingfi rms like Merrill Lynch, Lehman Brothers, and Bear Stearns wouldtake nonbank lenders public from time to time, but few managingdirectors on Wall Street who worked at these firms seriously believedthat these nonbanks had much in the way of long-term viability.Theidea was to take nonbanks public and then eventually sell them to fed-erally insured banks or S&Ls, institutions that took deposits from theGeorge Bailey crowd in Bedford Falls [ Pobierz całość w formacie PDF ]