Garrett, Watts Report for Feb. 1, 2010

To Our Clients, Colleagues and Friends,

• Last week we listed all those people you wouldn’t want to see naked, and we accidentally listed Allan Greenspan as Allan Greenberg. Regardless, the response was overwhelming.  Nancy Pelosi and Barney Frank were big winners (or losers), Nixon got lots of thumbs down, and surprisingly, no one objected to the idea of seeing Joe Biden getting out of the shower. Seven people wrote in Barbara Bush, three wrote in Dick Cheney, and Hillary Clinton got two write-ins. Many wrote us that it made them nauseous just thinking about this topic.
• Out of sheer boredom, we took eight of the larger banks and divided their current stock price by their 52-week low.  The idea was to see what multiple they had recovered by.  As an example, the Bank of America is currently trading at $15.41, so we divided that by its 52-week low of $2.53 and see that it’s up 6.09 times since bottoming out.

How’d you liked to have put $10,000 into Fifth Third stock when it bottomed out at $1.01? Today, with the stock at $12.28, that $10,000 would be worth $121,000. 

• If you’re a bit worried about Flagstar, find something else to worry about. They just raised $300 million of new capital and plan to double that. And their supervisory agreement with the OTS was one of the mildest ones we’ve seen.

• Some of you may remember Harmon Killebrew as a charter member the All Ugly Team, but we remember him for his power.  He hit 573 career home runs, was fifth on the all-time list when retired, hit 40 or more home runs eight different times, and batted in over 100 runs nine times. He led the league in homers six times, was an 11-time All Star, and get this, he didn’t get into the Baseball Hall of Fame until his fourth year of eligibility.  Can anyone explain that??
• If you want to know almost everything there is to know about a given bank, their FDIC Call Report is the place to look.  Banks have 45 days from the end of each quarter to file them.  Check out http://www2.fdic.gov/idasp/main_bankfind.asp  The website is a bit clunky at first, and the financials are not necessarily in a format you’re used to, but it’s worth it.

• There have always been people worried that FNMA and Freddie Mac would one day replace the middleman lender and deal directly with the borrower. While we never thought this was a real possibility, the paranoid among you will get freaked out to learn that these two entities are now going direct to borrowers to modify loans, by-passing servicers.  They’ll initially work through non-profits but also plan to open their own offices to deal with borrowers.
• People always talk about this or that movie being the all time biggest hit.  Here are the movies with the biggest domestic gross sales adjusted for inflation:

Avatar is #26 on this list, but it’s brought in $560 million and is still drawing big crowds. Snow White & the Seven Dwarfs (1937) and 101Dalmatians (1961) still generate millions every year for Disney, and it’s interesting that not one blockbuster came out of the 40’s. The Ten Commandments (1956) is still watchable, and except for The Sound of Music (1965), they all are.

• We predict at least 10-20 of you will write us that we’re totally wrong about Sound of Music. They will claim that it is actually the best movie ever made.
• And speaking of adjusting for inflation, let’s talk about Roger Maris.  In 1960 he was the American League MVP, hitting 39 home runs with 112 RBI’s and having a .283 average. In 1961 he signed a one-year contract for $36,000.  Even adjusting for inflation, that’s still peanuts, especially for the MVP.
• If you’re a parent waiting for those college acceptance letters to arrive, go rent Orange County . This just might be one of the ten funniest movies ever made. The basic story has to do with a high school senior trying to get into Stanford.                            

• We’re 100% in favor of a flat tax where there are no deductions, everyone pays the same rate, and tax returns are one page long. Still, we really object to people saying we’re over-taxed.  When Pres.  Kennedy came into office, the top marginal rate was 91%.  His tax cuts took the top rate down to 70%, and they stayed there till Reagan brought them down to the 30-35% range.  So when people complain that we’re over-taxed, they just don’t know their history. 
• The person at FNMA in charge of re-purchases is one Maria Brewster. If you sold fraudulent loans to FNMA, she’s  probably your worst nightmare.  
• There is a body of thought that the radiation associated with long-term cell-phone use can cause brain cancer, but a recent study showed that it appears to protect against and reverse Alzheimer’s-like symptoms in rats.  Go figure.
• A friend suggested we watch Jersey Shore , and we have one simple question:  Who exactly are these people, and what planet did they come from?
• Having taught Finance there many years ago, Saint Mary’s College of California is a favorite of ours, and their Galloping Gael’s basketball team is one we always root for.  They routinely win 23-24 games a year but rarely get invited to the NCAA playoffs because they usually come in 2^nd behind Gonzaga.  So far, Saint Mary’s is 19-3 to Gonzaga’s 17-4.  By the way, this tiny Bay Area school was once a national football power, routinely going to the Rose Bowl and other major bowls in the 20’s and 30’s.
  
• Saint Mary’s is run by the Christian Brothers Order, and while they may not have the quite the same scholarly reputation as the Jesuits, they were sure a lot of fun.  They owned a huge winery, and as a result, there was a ton of wine at the faculty lunches, and the Brothers didn’t mind drinking their share. At Christmas, college President Brother Mel gave each faculty member a case of really great wine plus a case of Christian Brothers Brandy as well.  How cool was that?
• We have an idea for an interesting public opinion poll.  Take all the people who ran for national office in 2008 and ask people who’d they vote for if the election were held today.  You’d include Obama and McCain, plus Hillary, Biden, Palin, Kucinich et al.  Would John Edwards get even 1%.  His campaign was about ending poverty, about the Two Americas and it turns out he was living Two Lives.  Sic Transit Gloria.
• Attached is a letter we sent to the head of the Financial Crisis Inquiry Commission.
• Key questions to ask yourself: (1) Did we prepare a 2010 budget, (2) Have we analyzed our secondary marketing leakage, (3) Did we earn at least 65 bps pre-tax on our production last year and (4) Do we already have a written plan to deal with increased rates and a 50% drop in loan volume?
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We hope this is as fun for you as it for us, getting together 2-3 times a week, talking banking and baseball, mortgages and movies, and other random thoughts.  Let’s keep meeting like this!
Garrett, Watts & Co.

“Helping lenders increase revenues, control costs, and better manage risk.”

• Joe Garrett      (510-469-8633)
• Corky Watts     (408-395-5504)
• Mike McAuley   (281-250-253