The Garrett, Watts Report (February 10, 2010)

To Our Clients, Colleagues and Friends,

Another comment from a client on the cost of repurchases: “One had so much equity that the investor allowed us to indemnify in lieu of repurchase. Unless the housing market falls another 35%, we’ll never pay a penny out on it. The others we settled for about 50-60% of the estimated liquidated losses. It really helps to have an experienced attorney with these issues!”

This is an interesting 1939 photo of members of the baseball Hall of Fame. At that time, the Hall had only eleven inductees, ten of whom are in this photo. The reason we like it is that nine of them are wearing ties, Base Ruth, front and center, being the only one who didn’t. Just further proof of what a cool guy he was. Did you notice that Ruth and Eddie Collins sitting next to him are both wearing two-tone shoes?

With the exception of the Babe, don’t they all look like bankers? Also interesting is that the one missing person was Ty Cobb, and it fits with his anti-social personality. Actually, many baseball historians think he was more than misanthropic, that he was mentally deranged and a true psychotic.
The people in the back row above, left to right: Honus Wagner. Grover Cleveland Alexander, Tris Speaker, Nap Lajoie, George Sisler and the great Walter Johnson. The front row is Eddie Collins, Babe Ruth, Connie Mack, and Cy Young.
Why do people seem to read this trashy little newsletter? We just finished re-reading a random sample of 30 e-mails we’ve received about this newsletter over the past two years. Four were related to something we wrote about the industry, and 26 were about such weighty matters as Michael Jackson’s dance moves, Pamela Anderson’s age, and why Spam and Twinkies are such good food items. If we never mentioned banking or mortgage banking ever again, would anyone notice? And if we dropped the human interest stuff, would anyone even read it? Two sobering questions.
Here’s another comment on how much you lose when buying back loans: “I have settled mine for an average of 60 cents on the dollar, and usually no cash, just a volume clip over 12 months.”

How big is New York City ? Its $59 billion annual budget is bigger than all but 36 countries. Its 260,000 municipal workers would make it one of the 50 largest employers in the world. Its police force of 37,000 uniformed officers is larger than the FBI.

We were reading an analyst’s report on banks of the Pacific Northwest . Banks they cover there are trading at 44% of tangible book value. If you invest in a basket of community bank stocks and can wait 2-3 years, a few will have been shut down, but many will be 10-baggers.

Guess what we just saw at the grocery store? Budweiser in a can pre-mixed with Clamato juice. Mixing beer with tomato juice sounds bad enough, but clam-flavored tomato juice???? Does that sound disgusting, or what?

We wrote last week about how irritating the French can be, and we got this from Pete Davis : “When Dean Rusk, Kennedy’s Secretary of State, was in France and Charles DeGaulle told him that he wanted “All US Troop off French soil, immediately” Rusk responded “Does that include the ones that are buried here?” You wonder if he came up with that on the spot or had been holding it in reserve for years and just waiting for the perfect moment.
The Pete Davis who sent this item about France is sort of a legend in California . He took over a floundering Bank of Commerce in San Diego , grew it, and sold it for just shy of 5.0 times book! That was around 1998 or 1999 if we remember correctly.
We accidentally listed Rafael Palmeiro as a home run hitter who didn’t take steroids. What were we possibly thinking? A few dozen of you wrote to us about this. One of these days when we’re really huge, we’ll hire a fact checker.
Weren’t The Who pretty pathetic at the Super Bowl? When we saw them at 19 at an upstairs joint at Geary & Fillmore in San Francisco , the energy on stage had a few hundred people jumping up and down. But 40+ years later, it’s, like, embarrassing. Guys, what are you talking about, teenage wasteland? You’re in your late sixties. By the way, they ended their show that night by smashing their guitars and drums to pieces. And any members of the Grammar Police: Is it “Weren’t The Who pathetic?” or is it “Wasn’t The Who pathetic?”’
One of the more interesting questions having to do with troubled banks is why they did so many construction loans. One answer is that they had yields quite a bit higher than many other loans. But if you assume the construction loan balance is essentially zero on day one and not fully funded till day 365, that means that the loan balance outstanding averages around 50% during the year. On a $3.0 million construction loan, doesn’t it then throw off the revenue of a $1.5 million loan? And doesn’t the smaller outstanding balance offset much or the entire higher yield?
Take your choice, a $3 million construction loan yielding 6.0% or a $3 million C&I loan yielding only 4.0%? All else being the same, 6% sounds much better than 4%, right? No way, Jose. And no way, Jose Conseco! Assuming an average balance on the construction loan during the year of $1.5 million, that loan throws off (at interest only) $90,000 during the year, but the loan at only 4% but which is fully disbursed on day one would throw off $120,000! You’d make an extra $30,000 on the lower yielding loan.
This writer never got much past being a Weblos, but did you know that Mike McAuley was an Eagle Scout? Not only that, but both his brothers also became Eagle Scouts, possibly one of the only families with three such high achievers.

We take it quite seriously when we see people who were Eagle Scouts. When going through resumes to hire someone, we’ll put a resume at the top of the A-pile if it shows that the person was an Eagle Scout.
We just finished re-reading The Ugly American, Eugene Burdick’s 1958 fictional book about American foreign policy. This book pre-saged the Peace Corp and applies just as much today to our relationships with the Muslim world as it did about our dealings with Asian nations fifty years ago. Burdick was a Cal Professor of Politic Science who also wrote Fail Safe, the ultimate Cold War thriller. Burdick died at a young age on his Berkeley tennis court, and to this day conspiracy minded lefties believe the CIA knocked him off for knowing too much.
Have you noticed fourth quarter earnings releases show that about half the banks are reporting profits? You can’t have a healthy economy without healthy banks, so this is a very positive sign.

This Saturday is the 65^th anniversary of the bombing of Dresden , Germany . In the evening of February 13, 1945, the British Royal Air Face Force sent 796 bombers that dropped 2,600 tons of incendiary bombs, starting a firestorm that burned 13 square miles of the Dresden ’s urban center. A second wave of bombers later that night dropped bombs eastward and south of the city, and the next day, 431 Americans B-17’s released 700 tons of bombs over residential areas as well as rail yards. An estimated 25-40,000 people died within 24 hours. A massive attack one a population center was a rational move to hasten the end of the war, but it was still immoral. Generals should stick to bombing military targets, not population centers.

The three of us will be, separately, in Sacramento , Seattle , North Carolina , Houston , Dallas , Baltimore and Pennsylvania in the next two weeks. And come see us February 23 where we’ll be the speakers at the Seattle Mortgage Bankers.

Garrett, Watts & Co.

Today’s bonus: TEN KEYS IN TOUGHT TIMES

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