The Garrett, Watts Report (February 20, 2010, upon returning from Maryland)

To Our Clients, Colleagues and Friends,

For the first four months of the 2010 fiscal year, the federal deficit is already $430 billion. Doesn’t it make you sick just thinking about it?
This year, interest on the U.S. government’s debt will hit 42% of expenditures. That means that of every $100 the government collects, it can really only spend $58 on things like defense, social security, and various programs, the other $42 going to pay interest on our debt.
Alan Greenspan was considered a genius during the boom years, and now people are blaming him for planting the seeds of the Global Economic Crisis. What’s kind of interesting is the mystery behind his Ph.D. thesis.

From an April 28, 2008 Barrons article on his thesis: “There are only two known copies: the Maestro’s own and the one we viewed. As far as we can tell, Barron’s is the only news organization ever to have seen the thesis since a third and now missing copy was removed from the public shelves of NYU’s Bobst library at Greenspan’s request in 1987, the year that Ronald Reagan appointed him chairman of the Federal Reserve Board…..Magazine articles and a new book, Deception and Abuse at the Fed have suggested that his degree was largely honorary and that the thesis was a cut-and-paste job, comprised of previously published, non-academic articles wrapped in a flimsy introduction. Two magazine articles in the late 1990s suggested that the thesis was entirely the work of Greenspan’s staff at the Council of Economic Advisers, which he chaired from 1974-1977.” There’s another side to the story, of course, but it’s apparently quite clear that the thesis involved no original research done specifically for the doctoral degree.
We flew into San Francisco from Baltimore a few days ago, and as the plane was landing, they played “I Left My Heart in San Francisco ” on the intercom. Just about everyone sang along. A sweet moment.
A bit of musical trivia is that Frank Sinatra recorded “I Left My Heart….” first, but he hated it so much that he had it yanked. Tony Bennett released his now-famous version, and the rest is history. We’d be curious to hear Sinatra’s version if it exists anywhere.
From Doug Mayer at MIAC: “One area of leakage that we observe consistently is in secondary where folks are using a spreadsheet-based model for hedging….. We find those folks are usually 10 to 20% over hedged all the time, mostly because their hedge models don’t measure (or shock) the servicing component of the pricing that they get from their investors. That leakage can turn into a geyser in a significant rally where pull-through drops, their hedges go quickly out of the money, and they have big pair-offs to pay.”
From First Cal’s Emil Fanelli regarding the joke about Bank of New York being so slow moving: “I once had the privilege of dining in The Bank of New York’s executive dining room. The dining room overlooked the East River , and I remember thinking that the slow-moving river currents were going at break neck speed compared to the bank I worked for.”
And then there was another stodgy bank, National Bank of Detroit . Their stock symbol was NBD, and we all thought we were terribly clever by referring to them as Nice But Dull.
Why did President Obama have to appoint a Commission on reducing the federal deficit? Isn’t it pretty obvious? Couldn’t a college freshman tell you that all you have to do is reduce spending or raise taxes or both? As Ronald Reagan said, “There may not be easy answers, but there are simple ones.” We had massive surpluses during the Clinton years, and the Congressional Budget Office projected a complete elimination of the national debt by 2009 – all of it – so if we did it once, we can do it again.
Here’s another comment on leakage from a client, a mortgage company owned by a commercial bank in the not-so-deep South. “With regard to leakage, I can send you a copy of the spreadsheet we use to record loans as they fund – it compares what we expected to receive on each loan to what we actually received and shows the differences recorded into the various income categories…Managers can look at the differences to see if they are significant enough to track down (i.e. not just little differences due to closing a loan at full balance and selling with a payment or so…” The company is Monarch Mortgage of Virginia Beach, owned by Monarch Bank, and it was one of the best run companies we saw last year. Actually, it was extraordinarily well run.
There’s nothing as good as laughing. Not chuckling or chortling, but out-loud laughing, so we recommend two very funny movies: Don’t Mess With the Zohan is about an Israeli commando who decides to become a hair stylist. The plot partly revolves some Palestinians who decide to bomb his salon, and as unbelievable as it seems, you could be Jewish or Palestinian and still laugh hysterically. There’s even a happy ending! Valentines Day is also hilarious. In many ways it’s a throwback to romantic comedies of the 30’s, but with a thoroughly modern twist.
A final comment from a client on re-purchases: “It’s really simple. In our experience, one bad loan will wipe out the profits on 60+ good loans.”
Terry Hodel was the President of North American Mortgage, and we remember his once saying that one bad loan wiped out the profit on seven good ones, and boy, things have changed since then? Sixty goods ones wiped out by one bad one sounds a bit high, but whatever the ratio is, it’s way up there. By the way, was there ever a better run company than North American?
We had a hamburger at a TGIF in Towson , Maryland last week, and the waiter seemed pretty cheery. When we asked how he was doing, he answered by saying “I’m living the dream.” Isn’t that wonderful? It’s hard to imagine that working at a fast food joint is anyone‘s idea of a dream, but it was a nice reminder that happiness comes from within and that people can be as happy as they allow themselves to be. By the way, it was the first time we’d ever eaten at a TGIF and it wasn’t all that horrible.
Speaking of TGIF, a good way to impress your boss is to walk in Monday morning and announce loudly and often TGIM, as in Thank God It’s Monday. Your boss will mark you as a real up-and-comer and it will totally annoy your co-workers.
We really liked Baltimore on our recent visit. We drove through block after block after block of abandoned row homes, but the downtown seemed very much alive and vibrant. It also seems a bit like Boston , with lots of colleges and lots of college students, and that always make for a livelier city. We have some ideas on how to revitalize the neighborhoods that have been abandoned there, but no one cares what we think, so we’ll just move on.
We have a theory on how to rate companies that has to do with their former employees: It seems to us that the top companies have lots of their people eventually go off and have great careers elsewhere. North American was one of those. A lot of great talent also came out of Countrywide and Headlands and a few others that come to mind. Great companies not only attract talented people, but they also groom them and prepare them for leadership.
You’re probably acutely aware of how hard it is getting publicity for your bank, so one of the attachments might be of interest. (click here) This is really embarrassing but this writer wanted some publicity for the ultra-tiny bank he ran, and besides hoping no one we knew would wander by on the day covered in this attachment, we mostly remember how bitterly cold it was. We had signs promoting the bank as the true heir to the BofA’s heritage (a red circle around North Carolina with a slash through it) and did it on the anniversary of the 1906 earthquake. Anyway, we opened a few accounts on a plank atop two barrels (think A.P. Gianinni) and the moment the reporter from the San Francisco Chronicle showed up and got his story, we closed up, went inside, and changed into normal clothes. It was embarrassing, but we did get some free publicity in the press and on TV. By the way, the little girl in the photo is 8-year old Hannah Garrett who cut school that day.

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This week’s cartoon is mildly funny but mostly a comment on yes-men, brief-case carriers, ass-kissers and sycophants. We remember one employee some 20 years ago who was a complete pain in the neck, always managing to disagree, ask tough questions, and bring up issues that no one wanted to deal with. She was a complete pain, but we wished we’d had 5-10 more of her. So the question is whether your company rewards those who tell you when you’re wrong, or whether you reward the team player who always tell you how brilliant you are. It’s a key component of your corporate culture, and it’s worth thinking about.
Finally, we’re not above bragging about clients and friends, so if you got a promotion, switched jobs, or did something you want to tell the world about, let us know and we just might run it. Have a good week. And write the President that he really needs to get the deficit under control!

Garrett, Watts & Co.

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