Can Mayor Bowtie Save Friedman Billings Ramsey? (FBR)

I'm a Washington, DC resident and a big fan of our bowtie-wearing former Mayor Anthony Williams. As a self-professed geek, he was the right man at the right time to turn around a completely broken city government -- and DC is doing dramatically better now than it was before he took over, back when much of the city was in receivership and a financial control board looked over the shoulders of our elected officials to make sure they weren't being too profligate.

But now he's gone -- and while it's probably time for new leadership for the city now that people think we need a leader now more than an accountant, I've been wondering where the Mayor would end up.

It turns out, he's going to the private sector -- and pretty quickly.

Mayor Williams is moving to Friedman Billings Ramsey (FBR), a local investment bank and REIT with a checkered past few years, and he'll be heading up a new real estate investment firm called Public Properties Realty Investment Trust for FBR.

Essentially, the new trust (which will be a FBR subsidiary unless and until they spin it off) will buy properties, probably mostly office buildings, from government and nonprofit owners. Those groups will then have access to (often much-needed) capital in exchange for the extremely valuable office space they own but still need to use, and in turn they'd lease the space back from the Trust.

Now, as an investor this actually seems like a pretty interesting idea -- relatively low risk, and I expect with the huge number of nonprofit building owners in DC and the valuable properties owned by municipalities around the country, the future possibilities are pretty impressive ... especially for a well connected guy like Anthony Williams, who logged a huge number of frequent flier miles while in office and certainly knows DC well (and DC is home to more insanely valuable nonprofit-owned office buildings than anywhere else, I'd gather, thanks to the many buildings owned by trade associations).

And maybe it's time to give FBR another chance. I've written a little about them in the past, and I owned shares years ago when their mortgage fund and investment bank were just taking off and were spinning off great dividends as they grew the business ... but I've still got a bad taste in my mouth about what happened to them.

I wrote last summer that I was pretty disenchanted by their decisionmaking, since they opportunistically merged with their mortgage reit just as that became a popular investment vehicle, then a couple years later sold off a third of their investment bank as investment banks were becoming popular investments. It makes one wonder whether there's a long term plan in place for growing what has been an unlucky MBS fund and a successful niche investment bank.

But I do like this new fund they're starting with Mayor Williams -- I'll be watching, and if I didn't have such a negative impression of the company I might be thinking that the shellacking the shares have taken over the past six months is a bit overdone.

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Corporate Restructuring for Fun (not profit)

I've written before about how irritating I find the great corporate restructuring dance to be -- most recently when I sold my shares of Cendant (CD) last year.

Today, another company I used to own, Friedman, Billings, Ramsey (FBR), is doing something very similar.

Again, they have moved in the course of only a few years from the importance of combining companies to "create synergies" to the importance of splitting a company up to "unlock value." As far as I can tell, in most of these situations the only folks benefitting are the corporate bankers and consultants -- and FBR, being a banker themselves, certainly ought to know that.

FBR is another local company for me, just outside DC in Arlington, VA. It used to be a small brokerage house and a separate mortgage investment REIT, but in 2004 (I think) the REIT bought the broker and we ended up with a high-yielding REIT that had a reliable and growing yield, thanks to the extra cash flow that the brokerage spun off and that was used to reinvest in mortgage backed securities.

That turned out to be a pretty great idea for investors for a short while -- FBR had a great 2004 and early 2005 ... but as soon as the great ride of the mortgage REITs appeared to be in danger (and, shortly after that, one of the founding partners got in some serious trouble), the company began to flounder. Even today, with a nice bounce from the spinoff news, the shares are much more than 50% below their highs.

As a former FBR owner, this looks quite distasteful -- the company essentially restructured, at significant cost, to ride the wave of enthusiasm for high yield mortgage-backed securities (and REITs in general). Now that that wave had certainly crashed, they're spinning off the brokerage house, which is moderately successful in its niche, to, it appears to me, take advantage of the new cresting wave in enthusiasm for brokerage houses as the big guys have released stellar earnings yet again. I'd prefer to own companies that build sustainable businesses and manage them effectively through good and bad times -- not companies that feel they have to reorganize every couple years to make it appear as though they're doing something, or impress their friends on Wall Street.

That may well be unfair, but it's yet another reminder for me about buyouts and spinoffs -- be careful, the synergies and cost savings don't always appear or, at least, don't often last ... and the temptation to do something will often lead to a reversal within a few years and a spinoff to release the stock value that they themselves "locked up" with their quest for synergies.

And what you end up with in the end is a damaged-looking set of companies, an air of desperation, and some high-cost corporate transactions that have permanently destroyed at least some shareholder value.

Wow, I haven't been that curmudgeonly on a Friday for a while -- but I come by it honestly. I really liked FBR when I first bought it, well before I started this site, and I still think the company's plan had great merit and could have led to much more success if its management had been ethical, patient, and loyal to long-term shareholder interests.

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