In 1999, just as the dot-com party was about to end in tears and broken wine glasses, a wireless networking company called Aether Systems went public and lifted off. The stock, priced at 16, topped 300 in March 2000. Aether raised more than $1 billion in follow-on offerings. Then it crashed. The stock has been mired in the single digits for the past few years.
The managers of Aether Systems proved to be phenomenally bad investors. They had a genius for buying at the top of the market. Between September 1999 and December 2002, Aether spent $1.666 billion in cash and stock to acquire 11 companies. Yet the company's market capitalization today is about $136 million.
Now Aether has a new bright idea: real estate! It's going to chuck the whole wireless thing and start trading mortgage-backed securities. In June, Aether decided that it would use a big chunk of its remaining cash to build a portfolio of mortgage-backed securities and then borrow more funds to purchase even more such securities. If you ever doubted the housing market was a bubble, this should erase those doubts.
What do a bunch of wireless executives know about bond arbitrage? Aether CEO and founder David Oros has degrees in mathematics and physics and owns a patent on a multifunction radar system, but has no experience on Wall Street. Unless the engineers in the company's Owings Mills, Md., headquarters have some savant talent for trading Fannie Mae securities, the company would appear to lack the intellectual capital to execute its new strategy.
Aether wants to borrow money at short-term rates and buy securities that pay higher interest rates. This so-called "carry trade" has been a deceptively easy way to make money in recent years, just as buying Nasdaq companies was a no-brainer in the 1990s. But the time to enter the carry trade was June 2001, not June 2004. In fact, many Wall Street firms have unwound their huge carry-trade bets in the past few months because short-term interest rates have started to rise. What's more, the mortgage-backed securities market is volatile and tricky. The giant firms that dominate it—Fannie Mae and Freddie Mac—can bang prices around, while there are hundreds of hedge funds and trading desks, staffed by professionals with decades of experience, just waiting to chew up and spit out a naive newbie.
People who buy mortgage-backed securities are in effect becoming housing lenders; they're buying pieces of the debt on houses. You don't have to be Suze Orman or Robert Rubin to realize that when housing prices are at historic highs, when interest rates are rising, when mortgage-dependent banks like Washington Mutual are reporting disappointing results, leveraging heavily into mortgages may not be the most brilliant move. It's the equivalent of a lawyer quitting his job in spring 2000 to become a day trader or a journalist deciding to become a speculative McMansion developer right now.
Nonetheless, Aether is plowing ahead. In July, when Aether sold off its transportation systems unit for $25 million, Oros announced that the company had already committed $75 million to the exciting new investment strategy. "We have begun the process of assembling our portfolio of mortgage-backed securities."
The transformation is apparently not yet complete. People who call Aether's offices receive a voice mail that welcomes them to "the global leader in enabling wireless computing solutions." But presumably the message will change. And there might have to be a name change, too. Perhaps they could change it to Ether. That's what management seems to have been inhaling.