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I apologize for the brevity of this write-up, but this is a short sale trading idea whose catalyst is dissemination of news which should weigh on the stock. Also, my first write-up went to cyber heaven somehow.

I believe FBCM represents a low risk trading short in light of the fact that some of the firm’s most valuable assets may have just walked out of the door. Trust but verify: This should be easy for those of you with coverage to verify. FBCM is not heavily shorted and quite easy to borrow. FBCM is the son of FBR, though the management team at FBR has reinvented the company many times in the past. There has on occasion been one public entity, then the bank and a mortgage REIT, then these were rolled up, then these were again de-constructed (FBR/FBCM). True financial gymnastics, but importantly they were all done in times of weakness/crisis, and never for the better of shareholders. FBR (as opposed to FBCM) is the poster child of the sub-prime debacle, having underwritten, researched, and invested heavily in the sector with its own footing in the equity which they underwrote (New Century, Saxon, New York, Aames, etc.), and also an entire sub-prime operation in Florida called First NLC. This is relevant because I believe it shows the material weakness which is prevalent at the management level of this company. I think that Eric and his gang are great sales people, terrific at getting deals jammed, but simply horrible at managing their own enterprise or talented employees.

Since FBCM was created and the nastiness of subprime was carved out to FBR, the firm has been on something of a tear in energy banking to smaller companies through traditional underwriting and private placement. This has been a good business for them given that their forte of financial intermediary / insurance banking has seen better days. Trust but verify: What has happened is that the senior members of energy investment banking walked out of the firm within the last 24 hours. This will hurt severely. This company is not terminal, but I’m not sure it is worth $325mm when they are losing money, have a now-way-out-of- whack expense structure, and just lost their crown jewel. Yes, people will still trade with FBCM, and I guess banking will still issue beauties like the Thornburg Pfd done earlier this year, but this loss is going to hurt. I also can’t help but believe that management will continue on as they always have, taking actions that benefit themselves to the detriment of shareholders and not-in-the-club employees. See the 2/26/08 filing Termination of a Material Definitive Change, etc. for one proof of this assertion or the Washington Post article that accompanied this release. Morale at the firm is horrid (yes, worse than the already depressive morale on the Street in general), and I would expect that this loss will push other sources of both variable and fixed cost out the door. Energy Banking from their website:

• #1 book-running manager of all common stock offerings for domestic mining, oil and gas, and utility and energy companies, with a market capitalization of $1 billion or less⁵

In 2006, FBR Capital Markets’ Energy & Natural Resources Investment Banking team raised $2.3 billion in 12 transactions, seven of which we lead managed. 

During a relatively slow period in the oil and gas investment banking market, the group broadened its franchise beyond the oil and gas sector, completing its first transactions in minerals and power generation – a $206 million private placement for a leading U.S. metals producer and a $777 million private placement for a power generation company.  In 2007, FBR Capital Markets continued to be the #1 book-running manager of all common stock offerings for domestic mining, oil and gas, and utility and energy companies with a market capitalization of $1 billion or less.¹

During 2006, FBR Capital Markets raised a total of $414 million in three, separate Rule 144A private placements for oil and gas exploration, acquisition and development companies.  We were the joint book-runner of a $390 million initial public offering for Aventine Renewable Energy, our second transaction for Aventine, a producer of ethanol.

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