20 Frequently Asked Questions About Motley Fool Long-Term Mortgage Management

The cat's out of the bag. Happy April Fool's!

1. Why is The Motley Fool creating Long-Term Mortgage Management?
Although the Federal Reserve's $1.25 trillion program of purchasing mortgage-backed securities (MBSes) ended on March 31, America still faces a substantial economic overhang from the mortgage debacle. Therefore, the Motley Fool has a plan to relieve America of the burden of its housing fiasco, to foster economic growth, and to do what America does best -- provide opportunities for enterprising investors to profit from crisis.

For these reasons, The Motley Fool has stepped up to the plate with its newly created Long-Term Mortgage Management firm (hereafter referred to as LTMM), which will inject much-needed liquidity into the financial system by picking up where the Federal Reserve left off. With an implicit guarantee from the Fed, LTMM will quickly leverage its asset base to acquire $1 trillion worth of mortgage-backed securities.

Because the Motley Fool is dedicated to representing the interests of individual investors, we will offer qualified investors the opportunity to participate in the Fund.

Long-Term Mortgage Management was created to save America's financial system and the nation itself, by doing what America does best -- creating an opportunity to profit from catastrophe.

2. Where did you get $1 trillion?
Great question. It's all about financial engineering. For the novice, financial engineering is a groundbreaking science with influences from economics, physics, and ethical originality.

Here's how we got to $1 trillion. First, we're raising $1 billion from investors in LTMM. To help us get to that $1 billion watermark, we even offered The Motley Fool's most cherished asset, The Foolmobile (a 1995 Chevy Suburban), as collateral. Some of the highest-paid investment bankers we know valued the Foolmobile at over $5 million based on mark-to-model brand recognition, sentimental value, and the value of advertising drive-by views, as it goes to and from the bank.

Next, we borrowed $10 billion by leveraging this collateral 10-to-1. Learning a thing or two from Lehman Brothers, we then "un-factualized" this debt with repo 105 loans, which made us appear debt-free with that $10 billion still in the bank. From there it was just rinse and repeat, leveraging our $10 billion into $100 billion, and then $100 billion into $500 billion. The other $500 billion was borrowed from the Federal Reserve. Basic financial engineering.

3. How are you going to make so much money?
The idea is similar to picking up low-hanging fruit in front of a steamroller. The profit margin on each MBS might not move the needle, but the sheer volume of the program guided by intricate leverage is what makes it so valuable.

With our 50-50 funding split between Fed borrowings (costing 0%) and repo financing (costing 0.2%), our weighted average cost of capital (WACC) is 0.1%. (Our leverage is substantial enough that the cost of equity becomes a rounding error.) Benchmark Fannie Mae MBSes currently yield 4.37%, so the interest spread on $1 trillion in assets is approximately 4.27%.

4. What exactly are mortgage-backed securities, anyway?
Please see our short primer on how to profit with mortgage-backed securities.

5. I want to help The Motley Fool save America and profit from the housing crisis, too. How can I participate?
To raise $1 billion in equity from investors we need your help! Due to high demand and limited space, it's important that you call our broker today at 703-254-1445 to reserve your spot and request a login for LTMM's website. Once approved, you'll be able to instantly sign in, contribute funds, and begin profiting. You can also send us an email to express your interest in investing with LTMM and to receive updates on our progress. Thank you for your support!

6. How much profit can I expect?
Assuming mortgage and overnight interest rates stay the same, our current projections for Fund profits are $42.7 billion before management fees.

For our investors, after fees (see below) we expect to pay out $2.16 billion in dividends in the first year. This will represent a yield on your initial investment of 216%.

7. How will management compensation be determined?
Unlike many financial firms, we strive to ensure compensation is fair and properly aligned with investors' interests. We profit when you profit. LTMM follows a 5-and-50 model. That is, each year management receives 5% of assets under management and 50% of the remaining profits plus a modest vig.

8. How does this compare to the rest of the industry?
We believe very strongly that performance is the ultimate narrative. Therefore, hiring and retaining top talent is central to our mission to do right by our shareholders, our employees, the Fed and private creditors, and the American economy.

9. What risks do you foresee?
Proper risk management is at the heart of our success. LTMM is careful to design and implement tangible, industry-leading risk management procedures. Our risk management strategy is four-fold:

  1. In startups like this there is always a chance of being too successful, which is why we copied Google's motto of "Don't Be Evil."
  2. LTMM is managed by some of the finest talent in the industry, including two Ph.D.s and a boy genius (see below).
  3. LTMM has purchased a substantial credit default swap position on itself from a major, federally backed insurer. Should we face unforeseeable problems, profits from that hedge will more than make up for our total MBS position.
  4. Finally, with $1 trillion under management, LTMM will certainly qualify as "systemically significant" -- too big to fail for those uninitiated with the new regulatory jargon. We intend to leverage our close relationship with the Federal Reserve and implicit government guarantee to ensure that all of our stakeholders, mainly us, are fairly protected.

10. Could LTMM lose vast sums of money if interest rates rise?
We've thought about that a lot. Frankly, evidence that the housing bubble was caused by greed alone isn't very strong. Several factors, including a massive trade imbalance with China, faulty regulation, and fumbles by the ratings agencies contributed to the crash of 2008. Moreover, we think the recession probably ended sometime last year.

11. Why did you pick $1 trillion? Why not $500 billion, or $2 trillion?
Tea Partiers don't even bat an eye at the word "billion" anymore, but $2 trillion would have been ludicrous.

12. Who is on your team?
LTMM's world-class management team consists of three of the most widely respected experts in the mortgage-backed security markets: Jane Vegas, Ph.D., Jerry Mofsen, Ph.D., and Ilan Moscovitz, "boy genius." You can read their bios here. They're also currently hiring other experienced quants and compensation specialists.

14.  Is this too good to be true?
This is a once-in-a-lifetime opportunity.

15.  Have you considered saving Europe/Greece?
For the next year we intend to take a conservative and highly focused strategy that is deployed in the United States only. So to start, we'll be acquiring only $1 trillion in American mortgage-backed securities.

As the merit of our strategy is borne out over the next year, we anticipate entering Europe and especially Greece, since it bears some of the closest resemblances (e.g., near-insolvency, sunshine) to troubled American markets such as Florida, California, Nevada, and Arizona. We hope to secure backing from the European Central Bank similar to what we secured from the Federal Reserve.

With some luck, other real estate markets around the world may need our assistance, and so we may be able to scale the business substantially in the coming years. For example, our crack team is just beginning its due diligence on China. But it's really too early to speculate further.

16.  How will this affect The Motley Fool's nonfinancial offerings?
As a result of establishing LTMM, we anticipate developing an even more robust model of the American economy, meaning we have a greater opportunity to add incremental value by providing our members with the type of information they need to make informed investing decisions.

17. What should I do if I lose a share certificate?
Don't panic. Simply email LTMM's Office of Investor Relations to request a replacement as well as a backup copy, and be more careful next time.

18.  What is your credit rating?
A-OK. Our ratings generally fall into the Tier 3 asset classification. As such, LTMM's internal auditors' proprietary models estimate our rating to seven decimal places. Major ratings agencies have also found our models to be completely legal.

19. I've heard rumors that The Motley Fool is shorting the housing market. Is this true?
We can't comment or speculate on this specific issue, but we have a robust internal firewall. Regulators are satisfied with our word that our proprietary traders won't know specifically which securities LTMM intends to buy, nor will LTMM know much about what our traders are up to. The two groups don't see each other very often anyways, outside of the company's annual barbeque, New Year's gala, and off-campus investment coordination meetings.

20. Since LTMM is backstopped by the U.S. government, do you pay taxes?
LTMM is a registered Delaware charity. As such, we are tax-exempt. In addition, we will deduct the mortgage interest backing the securities we own. This will result in a slight-to-enormous tax refund each year. We intend to use the proceeds for general administrative purposes and enhanced employee 401(k) matching and well-being programs. We may also use the proceeds to fund potential mergers and acquisitions.

Question? Comments? We'd love to hear your thoughts on Motley Fool Long-Term Mortgage Management, so send them our way at mortgagebackedsecurities@fool.com


Read/Post Comments (6) | Recommend This Article (95)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 02, 2010, at 1:14 AM, McCaution wrote:

    Your management compensation figures appear to be a bit frugal by today's standards. Do you think that will be good enough to retain highly qualified managers? I'm interested, but not if the managers are not adequately compensated.

  • Report this Comment On April 02, 2010, at 2:33 AM, nn99 wrote:

    nice April's fool

  • Report this Comment On April 02, 2010, at 3:50 AM, ratherblucky wrote:

    Someone has too much time on their hands. Get back to doing stock research.

  • Report this Comment On April 02, 2010, at 10:22 AM, Skeedoodle wrote:

    By the time I got to the second FAQ question I was smiling and saying "What? The Fool has started doing what the Government is doing? HA! That's funny!!

    What was yesterday? That's Right!. April Fools!!

    Now buy me a house!!!

  • Report this Comment On April 02, 2010, at 1:33 PM, jamesthefool100 wrote:

    Thanks for the offer but I have already invested in a similar plan, however someone make off with the funds.

  • Report this Comment On April 02, 2010, at 2:21 PM, Jimbig1 wrote:

    Going forward, we have baby boomers valuations that have been slammed a little, their second home isn't worth that much, and pretty soon, they will be going from taxpayers to tax takers. While this is happening, the government is oversized greatly, spending trillions we don't have, promising everything to everyone, while the biggest population bubble is starting to retire. The population following is smaller and boomers will be selling there second home. Who is going to buy all this stuff, like prices never go down...so MBS thought...

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