The Garrett, Watts Report (January 2, 2010)

To Our Clients, Colleagues and Friends, 

· Last week we mentioned the cost of a year at Stanford in 1955 as being $705, so if we take that and run it out to today’s cost of about $55,000, it means that the cost of attending Stanford has been climbing about 8% a year over the past 50 years. Stanford, by the way, is referred to as Stanfurd by people at Cal . For some reason, Cal students think this is hilarious.

• A large percentage of what we do is to help companies not doing too well,  but we also get to see many companies doing extraordinarily well.  If we look at Mountain West, Academy Mortgage, and New American Mortgage, all three are extremely profitable. Mountain West is traditional wholesale, Academy is traditional retail, and New American is a Call Center operation, but all three share a few things in common: (1) Owners who look at the big picture but pay attention to the slightest detail that might hurt profits, (2) tight control over costs, and (3)  very tightly run secondary marketing operations.  The last one means that they price in decent margins, and they realize those margins.  There is almost no leakage.  If they build in 125 bps profit on a loan, they get 125 bps.
• We got lots of nominations for movies about friendships. Brian’s Song was the runaway winner, with the following getting at least two votes. Midnight Cowboy and Shawshank each got eight votes.  Here they are, not listed in any particular order.

In Her Shoes is really about sisters, but the people who nominated it were right.  It’s about the friendship between two sisters.  We saw it, and it may be Cameron Diaz’s second best role (Something abut Mary will always be #1), with her atypically playing a loser.  

• Another excellent compliance consultant is Theresa Ballard .  You can reach her at [email protected].  We frequently run into people who have used her, and they speak highly of her.  
• Some famous people died this year, and is there ever a year in which famous people don’t die?  The names that come to mind are Ted Kennedy, Michael Jackson, Patrick Swayze, Walter Cronkite, and Farrah Fawcett.  Farah Fawcett’s poster was in every college boy’s dorm room at one time. Only a very few college students had Walter Cronkite posters in their dorm rooms.
• At midnight Thursday in Moscow , it was the 18^th anniversary of the last minutes of the Soviet Union .  Their Politburo, a phony Parliament,  had voted earlier in the month to dissolve the USSR , and at midnight, December 31, 1991, the Hammer and Sickle flag of the Soviet Union was flown over the Kremlin for the last time.  Gorbachev officially resigned, the flag was hauled down, and one of the most evil regimes in the history of man ceased to exist, relegated, as Ronald Reagan had once predicted, to the ashbin of history.
• Why isn’t this man smiling?
  
  Jamie Dimon was probably the most successful banker of the past several years, with JPMorgan Chase dodging most of the catastrophes that hit banks so hard. Our sense is that he’s very good at not chasing trends that generate great returns but which entail too much risk when you look at them carefully.  If we could make one suggestion, though, we’d like to see him choose either JP Morgan or Chase, but not have both in the name.
  There was a great Far Side cartoon about Lewis & Clark, with Clark ’s wife yapping at him to get the name to be Clark & Lewis.  So when thinking of bank names, it makes you wonder if William Fargo spent his whole life resenting Henry Wells, wishing they could have called their company Fargo Wells.

• A major Wall Street firm did projections for what the total losses would be over the full credit cycle. They were losses of $82 billion for JPMorgan Chase, $106 billion for the Bank of America, $117 billion for Wells Fargo, and $122 billion for Citigroup.  That’s a heckuva lot of red ink.
• It’s estimated that over 10 million borrowers owe more on their mortgages than their homes are worth.  Economists estimate that it would take over $800 billion to extinguish borrowers’ negative equity and give them a 95% loan-to-value ratio. Crazy, sad times for a lot of people.
• We always like reading about newer, entrepreneurial companies that validate our optimism in America ’s economy ability to constantly reinvent itself.   A perfect example that Schumpeter’s Creative Destruction theory of capitalism is still alive and well is Netflix, a company that didn’t exist 12 years ago. Movie theaters are closing or struggling everywhere, but Netflix is about to report $111 million in profits on $1.67 billion in revenue. They may not sell any popcorn, but they have 11 million customers who pay a subscription fee month after month.
• All the newspapers are filled with Top Ten lists, for the past year and the just completed decade.  Top books, top movies, and so on. If we had a Top Ten list for sporting events of the past decade, for us, it’s a hands-down no-brainer.  It was the Oakland A’s 20 game winning streak in 2002.  Think of how exciting even a 5 game win streak is, or 8 games or 10 games. But 20 games in a row?  It was a magical three weeks and a fan’s ultimate dream.
• We just saw about 30 seconds of TV show Dance Party.  It’s a kind of like Dick Clark’s American Bandstand, but this was people in their forties or fifties (and older) dressed up like when they were teenagers, dancing to music from the 1950’s.  It made us embarrassed for our entire generation.
• Our 2^nd favorite Pac-10 team is the Oregon Ducks, and did you know that their mascot is the only college mascot ever designed by Walt Disney? Not the company, but good old Walt himself.
• Speaking of mascot trivia, Stanford used to be the Indians, but they became the Cardinals (as in the bird) for a few years, then dropped the plural to become the Cardinal (as in the color). William s College has the Purple Cows, CalTech and Oregon State are the Beavers (always good for a laugh) and 32 schools are Cougars (also good for a laugh).  Cornell is the Big Red, Harvard is the Crimson, and Alabama is the Crimson Tide. Tulane is the Green Wave, Dartmouth is the Big Green, and North Texas is the Mean Green. Pacific University is the Boxers, although it’s hard to know if this means the dog or the underpants.  Finally, UC Irvine has the Anteaters and UC Santa Cruz has the Banana Slugs.  These dumb and dumber names came about because the University gave students the right to choose their own mascots when these schools opened in the 60’s.  What else would you expect from a bunch of 19 year olds sitting around drinking beer and smoking pot?  If you’re thinking of starting a college, do not let the students pick the mascot.
• And you know how people will refer to certain weird, disorienting things as being Kafkaesque?  In the Outback Bowl game Friday, Northwestern quarterback quarterback Mike Kafka completed a staggering 47-of-78 passes for 532 yards and five touchdowns.  For the opposing Auburn Tigers, it must have been downright Kafkaesque
• You know those pesky little penalty fees when you’re late on your credit card payments?  Those little fees generated $23 billion in revenue for card issuers last year.  Unfortunately, credit cards are a scale business, and they just don’t make sense for most community banks.
• We enjoyed The Ninth Wave, but we came across this one bit of writing, describing a college poker game: ”The pot was almost a thousand dollars now.  The room was quiet. Down the hall a door slammed… bare feet sounded on the corridor floor….. a shower hissed somewhere.”  Isn’t that awful writing?  There was some contest for bad writing a few years back where the winning story began with “It was a dark and rainy night.  Somewhere a dog barked.”

Let’s all have a great 2010.Garrett, Watts & Co.  Helping mortgage lenders increase revenues, control costs, and better manage risk.Joe Garrett         ([email protected])Mike McAuley      ([email protected])Corky Watts         ([email protected])