Value Added: Sitting Down With Manny Friedman

By Thomas Heath

I had been trying to get Manny Friedman to talk to me for almost two years. He is the "F" in FBR. That's Friedman, Billings, Ramsey Group, the Rosslyn-investment bank that made its three founders very wealthy from their plays in banking back in the early 1990s.

Friedman is worth listening to. He is a respected investment mind around Washington. Some speak of him in the same breath as Bill Conway, the co-founder and investment guru at The Carlyle Group, the District-based private equity firm.

Friedman adds value. He can riff on the miracles of modern productivity one minute (he believes cell phones are transformative because they allow for the instantaneous movement of money and ideas) and then expound on the economic law of increasing returns, which holds that once a society chooses a certain path such as getting behind the internal combustion engine, that path gains a powerful foothold in society and is very hard to dislodge

Emmanuel Friedman

When he sidled up next to me at a fundraiser in Rockville a little over a week ago and said he wanted to talk, we agreed to meet in his Arlington office. Friedman left FBR three years ago after an investigation by the Securities & Exchange Commission into stock trading there.
Friedman and some other members of the FBR team paid healthy fines; Friedman paid a total of $1.25 million in fines to the SEC and National Association of Securities Dealers. There were no convictions or admissions of guilt, and one person who fought the investigation had their case summarily dismissed.

Friedman has been a bit publicity shy ever since.

His investment fund, EJF Capital, is a two-minute drive from FBR.

Why did he go on the record after years of silence?

"I'm scared," said Friedman, 62, eating a tuna-wrap at a conference table. He points to a flat-screen television where the ticker across the bottom shows the Dow Jones Industrial Average down another 5 percent. "If this continues 20, 40 more days, it's over with. The meltdown of the financial system is just happening at lightning speed. They can't get ahead of the curve. When they say A, it's already A plus 12.",

Friedman is a prolific day-trader of stocks who ran FBR's hedge funds and managed the portfolios of FBR's wealthiest clients. He admits to making his share of mistakes. But this is the guy who made his fortune shorting bank stocks during the savings and loan crisis of the late 1980s-early 1990s and then betting long and riding them back up.

Those bets helped pay for his sprawling collection of framed letters and autographs of famous Americans lining the walls of his office. One is signed by George Washington, another Civil War Union Gen. George McClellan.

I was drawn to the memorabilia of the leaders of American capitalism. There's a framed certificate of the Edison Phonograph Works from 1888 and a Standard Oil Stock Certificate signed by both John D. Rockefeller and Henry M. Flagler. My favorite is 1933 Oklahoma Oil Corp. stock certificate signed by Jean Paul Getty, one of the richest post-World War II era Americans and, I must confess, one of my heroes when I was growing up. I have always followed rich guys.

Friedman even has the certificate from the first stock trade he made in 1961 when he was around 15. It was a $36 profit on shares of Lorillard tobacco company. His father, Samuel A. Friedman, served as custodian for young Emanuel J. Friedman.

While he said he is ultimately optimistic that capitalism will survive our current panic, Friedman said the government needs to act more swiftly to avert double-digit unemployment and a depression that could destroy trillions of wealth.

So what would President Friedman do?

The former social studies teacher grabbed a Sharpie marker and started writing on the giant white board that fills the wall behind him.

"You appoint the New York Fed Governor [Timothy] Geithner Secretary of the Treasury tomorrow. He will bring on a team of 40 people and he will work hand in hand with [current U.S. Treasury Secretary Henry] Paulson. Because Paulson is paralyzed now. Paulson is so far behind the curve it's scary."

He said the Bush Administration must begin working with Obama's team immediately.
"If Osama Bin Laden had a thousand people crossing the border with nuclear weapons, would you say 'We're going to wait for the Obama administration to come in?'."

Friedman said the government must quickly inject the $350 billion balance of the $700 billion bailout package that Congress authorized last month into the banking system and into other big lenders to help spur auto loans, credit card loans, commercial real estate loans and business loans. He said the government will get its money back and hundreds of billions more from these investments.

Once those loans are packaged into securities, the government should again step in and buy the Triple A part of those securities -- which have the least risk -- in order to build confidence in the lending markets. Those securities are normally sold to pension funds, endowments, sovereign wealth funds and hedge funds. But those markets have locked up, choking any credit movement at the consumer level.

What else?

"They should have a policy for one year and if you qualify, meaning if you have the right income and X amount in the house, you can get a new mortgage at 5 percent from Fannie Mae and Freddie Mac. That starts to put a floor both in housing and puts a lot of money back into the system."

I asked Friedman who he admired the most in the current crisis.

"The person who has done the best is Jamie Dimon, [chief executive] of JP MorganChase. He was conservative. He pulled back. He ran a tight bank. Wells Fargo, whether you like it or not, has done a pretty good job also."

He also mentioned another Paulson. John Paulson, the hedge fund manager who has made billions the last couple of years betting on the collapse of the sub-prime housing market.

Friedman said the first signs that the market is stabilizing will be when the safest government and corporate debt, which are now trading for far less then their face value, begin to approach face value.

"You will see little signs spring up," he said, suggesting we should watch Freddie Mac for signs of an uptick.

I moved the subject to average investors. I told him I have been beavering away in my 401k and my taxable savings, buying stocks at ever cheaper prices. My holdings are down by more than 40 percent, but as a confirmed "buy and hold" investor, I should stay the course. Right?
"I think until the government does something, you've got to head for cash, because you are risking your last 60 percent. I don't see how you can buy stock. The system is melting down. It always does come back. But we're letting it melt down in a way that no one's ever seen before."

On the way out, I took a long look at J. Paul Getty's Oklahoma Oil stock certificate. Back in 1933, the average price for a gallon of regular gas was 17.8 cents, according to the Energy Information Administration, which is part of the U.S. Department of Energy. Adjusted for inflation, today's price equivalent would be $2.85. The average price for a gallon of gas a week ago was $2.07.

By Dan Beyers  |  November 23, 2008; 7:45 PM ET  | Category:  Economy Watch , Value Added
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Go to cash in your 401K now? Mr. Friedman, for those people in the general public who don't have a clue about risk and their own tolerance, this is the worst advice EVER.
Yes, if I was foolish enough to have short term capital in stocks right now, I would sell. But be quick to jump back in if/when there is major policy shifts that take hold.
But for those who do NOT need the money two to five years out. Selling now would be a catastrophe. They wouldn't know when to jump back in or what to buy when they did.
Reallocating your exposure to debt free companies and those with large cash positions will be the wise choose, because when things turn, they will be the companies operating and buying assets cheap.
-Mark G. Christie

Posted by: mgcrhcp | November 24, 2008 3:04 PM

Another puff article by Post on Manny Friedman and FBR. He was pushed out of FBR and left it in shambles. How is FBR stock doing??? still listed? Pushed out their assets in an IPO. How is that doing? The executives of FBR got $5M bonus each for their efforts.The millions spent for a golf tournament where most people think the sponsor is a defense contractor-KBR -not a financial entity is a waste of corporate funds. Now that the F and R are gone hopefully the B will not get all the giveaways. Hope the investors in Mr Friedman's Cap firm are doing better than the investors in his old firm and the spinoff.(Tom- too bad you waited two years to talk with Mr. Friedman. You got attracted to the suroundings rather than getting a real story i.e. how are his investors in EJF Capital doing vis-a-vis FBR investors. If he is held in such high regard by the investor community what is this based on???

Posted by: johndowney04 | November 24, 2008 8:37 PM

Oh brother, anyone associated with FBR, past or present, is a joke. Don't listen to their advice, unless you like losing your money. FBR is at 22 cents, due to the superb business minds at FBR. LOL.

Posted by: jginboca | November 27, 2008 9:59 AM

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