Friedman, Billings, Ramsey Group, Inc.

1001 19th Street, North
Arlington, Virginia 22209
U.S.A.
Telephone: (703) 312-9500
Fax: (703) 312-9601
Web site: http://www.fbr.com

Public Company
Incorporated: 1996
Employees: 433
Sales: $178.9 million (2001)
Stock Exchanges: New York
Ticker Symbol: FBR
NAIC: 523120 Securities Brokerage

Friedman, Billings, Ramsey Group, Inc. (FBR) is an Arlington, Virginia financial holding company that through its subsidiaries concentrates on three businesses: investment banking and securities; specialized asset management products, including venture capital funds; and the online investment banking activities of FBR.com. Although a boutique operation located in the Washington, D.C. area, FBR has proven that in today’s high-tech world, in which real-time market data is available outside of New York City, it can compete successfully against Wall Street firms much larger in size.

Establishing the Firm in 1989

The most prominent of the three partners who formed FBR in 1989 was Emanuel J. Friedman, the firm’s chairman and co-CEO. According to press reports, Friedman, the son of a Wilmington, North Carolina, rabbi, used his bar mitzvah money to fund his first investment at the age of 13. He bought ten shares of tobacco company P. Lorillard Co. and after two months sold them, realizing a $60 profit. After attending Wilmington Junior College, he earned an undergraduate degree from the University of North Carolina-Chapel Hill. He moved to the Washington area and began taking night classes at Georgetown Law School, supporting himself by teaching junior high geography. In 1972 he tried to land a job with a stock brokerage house but by his count was turned down by two dozen firms. Finally in 1973 he was hired as a retail broker by the Washington, D.C. firm of Legg Mason Wood Walker Inc., where he initially concentrated on the sale of gas, oil, and casino stocks. He did not fare particularly well during the early part of his career. Friedman told the Baltimore Business Journal, “I had years of failure until I turned 37, when I met my partners.” He turned his attention to following small savings and loan stock. In 1982 one of his future partners, Eric F. Billings, joined Legg Mason, then left two years later to work for Johnston, Lemon & Co., one of Washington’s most prominent brokerage houses. Friedman joined Billings at Johnston, Lemon where both men served as senior vice-presidents in the institutional sales group and they met the man who would become the third, and youngest, partner of FBR, W. Russell Ramsey.

During his five years at Johnston, Lemon, Friedman became the firm’s top revenue producer, selling to mutual funds, pension funds, bank trust departments, and other institutional customers, in the process gaining recognition in the Washington financial community. In some estimates, his institutional sales department accounted for as much as 40 percent of Johnston, Lemon’s revenues. With the stock market crash in 1987 the firm began to encounter some difficulties, then was stunned in 1989 when Friedman decided to leave in order to form his own company, in the process taking Billings and Ramsey as partners, as well as a large portion of Johnston, Lemon’s 25-person institutional sales department. Friedman maintained that it had been a longtime goal to start a firm and that he left Johnston, Lemon on friendly terms, despite hints in the press that internal differences led to his departure. Neither party, however, chose to publicly discuss any possible conflicts.

Opening for Business in 1989

Freidman, Billings, and Ramsey borrowed $1 million and set up shop as a research-based institutional brokerage boutique with $5,000 worth of used furniture in downtown Washington offices that had been abandoned by another brokerage. With Friedman serving as senior partner and holding the largest stake, FBR was focused at first on trading bank stocks and asset management, catering to large institutional investors and wealthy individuals. The firm quickly gained credibility in the eyes of investors when it was one of the first to warn of a collapse in the real estate market and urged customers to sell vulnerable bank and real estate stocks. According to a 1996 Washington Post profile, “The banking crisis provided the opportunity for FBR to move from stock trading—where money is made at a rate of 6 cents a share—into investment banking—where fees can be earned by the millions of dollars. Convinced that some failing banks could be saved if investors would pour in some cash, FBR raised $30 million to bail out Ameribanc of Annandale in 1992. Ameribanc stock sold for only $2 a share, but investors got $3 a share when First Union Corp. bought the bank two years later.”

It was FBR’s entry into the California market in late 1992, during the depths of a recession, that would solidify the firm’s reputation. FBR proposed a bold recapitalization plan for Glen-dale Federal, a thrift on the edge of bankruptcy due to bad real estate loans. Although it managed $18 billion in assets, Glen-dale had a total market capitalization of just $30 million. FBR believed that Glendale could be saved and that investors were simply overreacting by retreating from the California market. It offered to raise $450 million in new funding for Glendale, a bid that was accepted by the thrift’s management against the advice of the Wall Street firm of Goldman Sachs. The recapitalization plan worked, Glendale recovered, and FBR would go on to do many more lucrative bank deals. In addition to gaining the trust of investors, FBR generated the cash required for expansion and diversification.

In 1994 FBR formed a real estate group, bringing in veterans William R. Swanson and James D. Locke to head the operation. Despite never having raised money for a Real Estate Investment Trust, the firm soon undertook its first initial public offering (IPO), a solo effort that raised $350 million for Prime Retail Corp., a Baltimore shopping center owner. Because it elected not to follow the standard practice of spreading the risk over a syndicate of firms, FBR was able to retain the entire fee for the transaction. The real estate investment trust business, under the aegis of partner Billings, quickly became a major part of FBR’s growing activities. From a handful of former Johnston, Lemon employees in 1989, the firm grew to 200 strong by 1996, at which point the partnership evolved into a corporation, Friedman, Billings, Ramsey Group, Inc.

After the company started a mergers and acquisitions practice in 1995, Ramsey served as the point man for FBR’s entry into the technology sector, a natural fit for a Washington-based company. The surrounding area was becoming a hotbed for information technology and communications. Not only was it home to America Online, the Virginia-Maryland corridor featured a number of universities that were developing emerging technologies. Moreover, the Department of Defense was shrinking, with the likely result that a number of military and space technology companies would spin off with former DOD personnel. FBR’s first play in the technology arena was its 1996 underwriting of an initial stock offering for America’s first Internet bank, Security First Network Bank of Pineville, Kentucky. With Wall Street lusting after Internet stocks, FBR’s timing was perfect. Although the firm originally planned to sell 2.4 million shares for $15 to $17 a share, the interest was so intense that it elected to offer 2.8 million shares at $20 per share. Trading on the NASDAQ, the stock immediately doubled in price. With such a spectacular start, FBR was understandably enthusiastic about its technology business. Late in 1996 it launched Pegasus Venture Partners, a $25 million venture capital fund targeting Washington-area emerging high-technology companies.

With his partners staking out territory in real estate and high technology, Friedman focused on the company’s push into specialized finance companies. The three men appeared to worked comfortably together. In fact, a major aspect of FBR’s success was attributed to its corporate culture. Dress was extremely casual, generally jeans and shorts, and the three founding partners were known to everyone in the organization as Manny, Eric, and Russ. FBR provided daily breakfast, lunch, and dinner spreads in the company kitchen. It offered a company health club, complete with sauna and masseuse. Rather than raiding other companies, FBR preferred to hire young people who they could train and then promote through the ranks. As a result, the average age of employees was under 30, and the firm suffered almost no turnover. Overall, FBR was building a reputation as an innovative boutique operation that was proving that a company did not need to have a Wall Street address to become a significant investment player. Although that perception may have played well in the press, it sometimes complicated business. At times FBR was forced to manage an IPO on its own, and assume all the risk without broadening the range of potential investors, simply because it was unable to find a Wall Street firm willing to act in a secondary role. In addition, many Wall Street firms opted not to cover these stocks, resulting in depressed prices. As it became a major force in managing IPOs, FBR was also reluctant to act as a second fiddle to another firm.

Company Perspectives:

We believe that FBR occupies a unique position in the capital markets. From our roots as a research boutique, we have grown to a top 10 ranked national investment bank. Our research, institutional brokerage and investment banking services have placed us, with the Wall Street bulge bracket, among the top 10 lead-managed equity underwriters and among the leading research-driven national brokerages, in the United States. Yet, like a boutique, we achieve success through knowing our industries extremely well. This proprietary thought process enables us to provide independent research on small-cap to large-cap names, and to provide creative capital to issuers. We focus across research, brokerage, investment banking and asset management on six industry sectors: financial services, real estate, technology, energy, healthcare and diversified industries.

Going Public in 1997

By 1997 FBR had emerged as a powerhouse in the Northeast, with additional offices in California, Boston, and London. In October 1997 it announced that after managing numerous IPOs, the firm itself would now go public. In addition, PNC Bank Corp. agreed in advance to acquire a 4.9 percent equity stake as well as to establish a strategic alliance with the firm. For PNC, the deal offered a number of benefits. Aside from realizing a gain if FBR should prosper, the Pittsburgh-based regional bank was now able to underwrite public offerings of stock and forward its goal of gaining a national presence. It was essentially a referral arrangement, with both parties steering business to each other. In December 1997 FBR completed its IPO, selling $220 million in stock at $20 per share, an event that caused concern in some quarters. The Wall Street Journal reported, “It may be a sign, some traders say, that the peak is near when an investment-banking firm that has made its fortune this year underwriting IPOs of financial-services and mortgage companies decides to sell its own stock.” As much as 85 percent of the company’s revenues came from IPO underwritings, prompting the Journal to further speculate as follows: “Friedman Billings has all its eggs in one basket. And lately the basket has been looking a little tattered. Indeed, aftermarket performance of its deal, especially the flood of mortgage-company deals it helped underwrite this year, has been slipping lately.”

Despite concerns that 1998 would offer fewer IPO opportunities, especially among mortgage companies, FBR enjoyed a stellar start to the year. The $800.2 million the firm raised in four real estate investment trust deals bested all major Wall Street firms, making it the first time in a decade that one of the smaller investment firms earned top honors for an entire quarter. The success would be shortlived, however, as the stock market began to slide in June 1998, resulting in a scarcity of new issues. FBR managed just one IPO the entire summer, but of more importance, the firm chose to support some of the stocks the company had taken public, pumping almost $120 million into the market. In the end FBR was unable to maintain prices, resulting in a loss of $35 million by the time it was forced to back down and sell. In addition, the price of FBR stock suffered, losing close to 70 percent of its value, and for the first time in its brief history the company had to lay off staff, some 24 employees, or 7 percent of the workforce. After generating revenues of $256.1 million and net earnings of $34.3 million in 1997, FBR posted a loss of $16.2 million on revenues of just $122.9 million in 1998.

FBR regained some momentum in 1999 when it announced a new Internet venture, FBR.com what the firm boasted would be the first publicly owned online investment bank. The web site offered customers access to FBR research and other investment banking services. After catering to institutional investors and wealthy individuals, FBR was now looking to appeal to small investors by setting aside 20 percent of stock in the IPOs it managed for sale to clients of FBR.com. Maintaining that the initiative had been under development since 1996, FBR denied that this was an attempt to provide a short-term solution to the firm’s recent reversals. Nevertheless, investors responded enthusiastically, bidding up the price of FBR stock. By the end of 1999 the firm decided to make some structural changes to the organization. The founding partners turned over operational responsibilities to Robert S. Smith, a general counsel and executive vice-president, who was now named FBR’s COO. As a result, the partners hoped to focus on the firm’s future, in particular spreading its high-tech venture capital funds across the country and into Europe. To some observers FBR had become a technology shop, and others openly wondered whether this was the result of a strategy or simply trend chasing.

In January 2000, FBR announced a strategic alliance with Dawnay, Day Ladner, a United Kingdom venture capital firm, to invest in the Internet and associated technologies. Later in the year FBR teamed with Pacific Northwest-area entrepreneurs to create a venture capital fund to invest in technology companies in that region. On a different front in 2000, FBR initiated an acquisition of Money Management Associates, a Bethesda, Maryland, company that owned Rushmore Trust & Savings and controlled $920 million in assets. The $27.2 million deal was finalized in March 2001, and the assets were combined under the name of FBR National Bank, an FBR Group subsidiary. By acquiring a thrift, FBR had now grown from an investment boutique to becoming a diversified firm that offered broker-dealer services and investment banking with asset management, as well as retail banking.

While FBR was opening new offices in Cleveland, Dallas, and New York in 2001, one of its founding partners, Ramsey, stepped down from his position at the firm, although he retained his seat on the board and a 12 percent stake in the business. FBR also would invest in Ramsey’s new venture capital fund, Capital Crossover Partners, which concentrated on Washington-area technology, media, and telecommunications companies. Ramsey’s departure was the first step in FBR’s move away from the tech sector, which had failed to be as lucrative as the firm had once hoped. FBR opted now to focus on sectors where it experienced previous success, such as financial services and real estate. In general, 2001 was a transitional year for the company, which instituted cost-cutting measures that reduced its staff by 15 percent by the end of the year. With the economy in recession, FBR positioned itself to take advantage of an eventual recovery. A merger between the company’s real estate investment trust (FBR Asset Investment Corporation) and the FBR Group subsidiary, in a deal worth an estimated $750 million, was expected in 2003 to provide an infusion of capital for the firm. With no debt, a retail banking operation now in house, and its innovative spirit undiminished, the firm looked forward to a new era in its short but successful history.

Principal Subsidiaries

Friedman, Billings, Ramsey Capital Markets, Inc.; FBR Bancorp, Inc.; Friedman, Billings, Ramsey International, Ltd.; FBR Investment Services, Inc.; Friedman, Billings, Ramsey Investment Management, Inc.; FBR Venture Capital Managers, Inc.; Money Management Associates, Inc.

Principal Competitors

Robertson Stephens; SG Cowen Securities; Thomas Weisel Partners.

Key Dates:

1989:

The firm is formed as a partnership.

1992:

FBR arranges the recapitalization of Glendale Federal.

1996:

Friedman, Billings, Ramsey Group, Inc. is created.

1997:

FBR goes public.

2001:

Ramsey leaves the firm.

Further Reading

Andrejczak, Matt, “Trial and Error Pays Off for D.C. Investment Banker,” Baltimore Business Journal, October 3, 1997, p. 17.

Block, Valerie, “‘Culture’ Gets the Credit at Friedman Billings,” American Banker, September 30, 1997, p. 29.

Hinden, Stan, “Top Analysts, 18 on His Staff Leave Johnston, Lemon & Co.,” Washington Post, June 29, 1989, p. 1.

Knight, Jerry, “Investment Bankers Soar in Cyberspace,” Washington Post,May 27, 1996, p. F10.

——, “Three Men with a Vision,” Washington Post, October 28, 1996, p. F12.

Knight, Jerry, and Mark Leibovich, “Bulled Over by a Bad Market,” Washington Post, October 5, 1998, p. F12.

McLean, Bethany, “An un-Wall Street IPO Upstart,” Fortune, August 18, 1997, pp. 32-34.

Pulliam, Susan, and Anita Raghavan, “IPO for an IPO Firm May Be a Warning,” Wall Street Journal, December 26, 1997, p. C1.

Winig, Eric, “With Tech Sector Waning, FBR Changes Direction,” Washington Business Journal, May 4, 2001, p. 4.

Wirth, Gregg, “Friedman Billings Ramsey Becomes an Important Regional Player,” Investment Dealers’ Digest, May 26, 1997, p. 18.

—Ed Dinger