Commentary by Jonathan Weil
(Bloomberg) -- The near-collapse of the financial system was
supposed to have reminded the world about the hazards of chasing
short-term gains at the expense of long-term stability. Another
lesson we keep relearning is that investors’ memories are short.
Look no further
filed May 22 by PennyMac Mortgage Investment Trust, which was
created only four days earlier. It has no operating history and no
independent directors. As of May 19, its assets consisted of
$1,000 in cash.
PennyMac’s 14 senior managers are veterans of
Financial Corp., including Chief Executive
Countrywide’s chief operating officer until September 2006.
PennyMac plans to hold its initial public offering this summer,
assuming the Securities and Exchange Commission lets it.
back in the
And sometimes it’s hard to tell what is more unnerving -- mass
smugness or staring into the abyss. If your idea of economic
recovery calls for reinflating old bubbles so we can rise from
their wreckage, then PennyMac’s emergence is a welcome sign. The
flip side is that throwing caution to the wind may be making a
PennyMac is a
hedge fund dressed up as a real estate investment trust. It hopes
to raise $750 million and buy junk- grade home loans and
mortgage-backed securities on the cheap, through government
bailout programs and agencies such as the Federal Deposit
Insurance Corp. Located just a 10-minute drive on Ventura Highway
from Countrywide’s old headquarters in Calabasas, California, it
lists BlackRock Inc. and Highfields Capital Investments LLC as
investors, in addition to its own officers.
Layers of Fees
So far, not so
bad. Sure, there’s the unseemly image of Countrywide retreads
trying to profit from a housing bust they helped create. The
biggest risk for investors, though, may arise from the way
plans to pay its top executives.
are employees of a separate company, called PCM, or one of its
affiliates. PCM -- owned by the same investors that started
PennyMac -- will manage PennyMac and collect an annual base fee
equal to 1.5 percent of the company’s shareholder equity. It’s
also entitled to a quarterly incentive fee equal to 20 percent of
some weird, nonstandard profitability calculation.
A third company
owned by the same
will collect money for servicing PennyMac’s loans, including
percentage fees based on the loans’ unpaid principal amounts.
There would be other fees for these other companies, too. In each
case, PennyMac said in its prospectus, the fees “were not
negotiated at arm’s length.” You can’t say they didn’t warn you.
PennyMac loses money, the management company still could get its
base fee. As for the incentive fees, the prospectus said these
“may lead PCM to place undue emphasis on the maximization of
short-term net income at the expense of other criteria, such as
preservation of capital, maintaining sufficient liquidity and/or
management of market risk, in order to achieve higher incentive
After all, who
cares about preserving capital for shareholders when you’ve got
management’s pay to protect?
The emphasis on
short-term incentives was a big reason Countrywide and Merrill
Lynch & Co. got in trouble. PennyMac’s IPO will be managed in part
by Merrill Lynch, now owned by Bank of America Corp., which also
now owns Countrywide and almost half of BlackRock. (The
connections seem to never end.)
says other conflicts of interest in PennyMac’s relationship with
PCM “could result in decisions that are not in the best interests
of our shareholders.” PCM, which stands for PNMAC Capital
Management LLC, and its owners also may receive shares in PennyMac
at the IPO price should it go public.
runs two separate investment funds it started last August, using a
similar strategy. As of March 31, one fund had invested $152.9
million and seen its holdings decline in value by $7.1 million,
according to a quarterly report filed with the SEC. The other had
invested $155.8 million and was down about $9 million. The
valuations are only estimates, because the funds’ holdings are
almost all illiquid.
its prospectus about two weeks before the SEC accused three of
Countrywide’s former top executives of securities fraud --
including former CEO
though not Kurland or anyone else at PennyMac. PennyMac officials
declined to comment, saying they can’t talk while the company’s
SEC registration is pending.
Don’t get me
wrong. I realize many investors will see PennyMac’s fundraising as
a healthy sign that the economy could be turning a corner. Still,
a lot of us prudent folks wish we could return to an investment
climate where stigmas matter, and startups have to show profits
before big Wall Street banks will help take them public.
It’s not so
much PennyMac and its prospects that should give us pause. It’s
all the other fly-by-nights that a PennyMac IPO might inspire. If
this puppy can get on a national stock exchange, we could be off
to the races again. Too much of that, so fast, may not be such a
Weil is a Bloomberg News
columnist. The opinions expressed are his own.)
To contact the
writer of this column: Jonathan Weil in New York at
Last Updated: June 18, 2009 00:01 EDT