The three men, who met while working together at brokerage firm Johnston, Lemon & Co., enhanced Washington’s image as a financial hub as FBR developed a respected stable of analysts and securities platform.
The firm ran into trouble during the downturn as it suffered severe losses in subprime mortgage investments. It eventually split in two companies: FBR Capital (now known as FBR & Co.) and Arlington Asset Investment Corp., headed by Billings.
Though he will no longer have a role at FBR, Billings will continue to run Arlington Asset and Billings Capital Management, a hedge fund he started with his sons. Capital Business recently caught up with Billings for his thoughts on the state of Washington’s financial services sector.
Why are you stepping down from FBR as chairman now?
The company has evolved through the brutal capital markets downturn and has just completed a series of large transactions — underwriting $550 million to fund NMI Holdings — that are the hallmark of FBR. It gives me great comfort that [FBR chief executive] Rick Hendrix and the current management are doing a really fine job.
The capital markets are in a bit of a dormant stage, but we’re slowly coming out of it now and FBR will almost certainly be one of the leading companies to demonstrate that.
How would you characterize the state of the financial sector in the Washington area?
The financial market in Washington is certainly not big, but you have FBR, Carlyle and Capital One — some very significant players.
I think we’re evolving; you’re seeing a number of hedge funds that have been created within the Washington area — Manny Friedman has started a hedge fund, Russ Ramsey has started a hedge fund and there are numerous others.
In addition, you now have a number of broker-dealers that are in essence new versions of what FBR was in 1989 and 1990. Many have spawned from FBR — Compass Point run by Scott Dreyer, Height Securities run by Andrew Parmentier — and have gone on to employ 40 or 50 individuals.
Where do you see the most opportunities for growth within the financial services sector?
You’re going to see the re-creation of the specialty finance industry — securitization financing companies, mortgage insurance companies — which have a great presence in this region.
In 20 years, the United States had created a specialty finance industry, which was bigger than the banking industry and it was unregulated. It was this lack of regulation, specifically the lack of capital requirements, that allowed for massively excess leveraging, which created the ultimate break in the financial system. That broke apart the non-bank specialty system. And the reason the country’s recovery is so lethargic is because the financial lending and delivery apparatus is still broken.
While the banking system is recapitalized and the healthiest it’s ever been, the non-bank sector is still broken. Specialty finance will be restructured on a far sounder basis, where rating agencies and regulators will require capital that is much more consistent with the character of loans. It’s going to be enormously important in this country. And this is where you’ll see the greatest activity in the financial services industry over the next five to 10 years.