David Lerner, a portfolio manager at Omega Advisors, says Erbey, "combines great vision with tremendous depth and detail of knowledge and so is able to really direct these companies in a way that is probably irreplaceable, so you lose some of that future value creation -- you know, What's Bill's next great idea? but if something were to happen to him the companies as they are today would be able to operate and are on nice trajectories."
Undaunted by Complexity
Erbey has a knack for diving into complex tax or accounting issues and, through a kind of alchemy, finding untapped reservoirs of value. More than 20 years ago, he developed a product called a NERD (non-economic residual) used to absorb phantom income created in certain types of mortgage securitizations.
The fact that the Internal Revenue Service wrote a rule specifically dealing with the tax treatment of NERDs demonstrates their importance, says Viva Hammer, a Brandeis University professor who was previously responsible for law and policy in the taxation of financial products at the Treasury Department.
"The IRS hardly ever writes regulations on financial products," Hammer says.Creating five different companies out of Ocwen rather than keeping all the businesses together was a decision Erbey says he did not take lightly. "There is an infrastructure cost and a friction cost of having independent public companies," he says. However, he believes having separate CEOs better incentivizes management. "I want them to feel that it's true that they own those companies. It's their company -- that they're really invested in making that company succeed, and I think that provides financial rewards, but also psychic rewards for being able to do that." But Erbey also believes breaking the companies up allows investors to see value they might otherwise miss. "Some of our businesses are reasonably complex, and when you keep them all in one bundle, it's hard for shareholders to really understand and also to properly value the various cash flow streams. For example, we spun out Altisource (ASPS), which I firmly believed at the time we spun it out we had zero value for it when it was embedded within Ocwen and now people see it's a process-driven business and it's a couple billion dollar market cap." Splitting up the businesses doesn't necessarily make them simpler, however. Erbey says creating HLSS allows Ocwen to fund itself less expensively than it would be able to do on its own. The key lies in the fact that HLSS pays a dividend. "When stocks pay dividends people require lower returns. You can argue about whether that's right or wrong but it is a fact," says one investor in a few of Erbey's companies. The investor acknowledges, however, that creating HLSS merely to buy MSRs from Ocwen is "just splitting up the pie in different ways." (He says he doesn't want to discuss this on the record because he doesn't want the hassle of having other investors calling him up to argue about this point.) If you are still not sold on the reason for HLSS's existence, you are not alone. Kramer, the hedge fund investor who is also former chairman of the New Jersey Investment Council, says a few pension funds he introduced to Erbey declined an opportunity to invest in HLSS ahead of the IPO. "It was so exotic, understanding it went beyond most people's skill sets. You've got a lot of that going on right now in financial services. Financial services is changing big time and so the people who have these new 'show me' stories where it's never been done this way before, you can imagine that when you walk into a room and say 'I'm going to develop a different model than what has existed previously' -- that people don't sort of naturally latch onto it." That said, Kramer points out that many of those same skeptics will "be comfortable investing in a bank even though the bank is now subject to a totally different rulebook which hasn't even mostly been written yet. So since the rulebook is totally different and the externalities are totally different, what's the difference what the historic multiples of earnings were? That was a totally different world with totally different rules, but people think they know what a bank is and how to value it. They don't know that about the things that Bill does."