The Garrett, Watts Report (which people call the Garrett, Watts Newsletter: March 8, 2010)

To Our Clients, Colleagues and Friends,

Have you (1) noticed that there are earthquakes happening everywhere now, and not just Haiti and Chile , and (2) did you see the movie2012? Even if you’re the most rational person in the world, it’s hard not to wonder if something’s going on here. By the way, the special effects in 2012 are much better done than anything in Avatar.
Go back to 1965. Maybe you were in high school, maybe weren’t even born. But if someone had invested in Berkshire Hathaway then, they would have averaged 22% a year for these 45 years. The second best mutual fund (treating Berkshire like a mutual fund) was the Fidelity Magellan Fund which averaged 16.3%, and then the Templeton Growth Fund at 13.4%. Assuming you put $60,000 into each of these funds back then, here’s what you’d have today:

Berkshire Hathaway	$80.1 million
Fidelity Magellan Fund	$ 9.1 million
Templeton Growth Fund	$ 2.9 million
S&P 500 Index	$560,000

There must have been at least one kid somewhere who had his Bar Mitzvah in 1965 and was given $60,000 of Berkshire Hathaway stock. Even if it was just $10,000, he’d have $8.0 million today.

Here’s an interesting quote from the Springfield ( Mass. ) Republican in 1865: “A billiard saloon, a restaurant and a Wells Fargo office are the first three elements of a Pacific coast or mining town.” And no, we don’t go researching articles on banks from the 1860’s. This quote is from the Wells Fargo calendar hanging in our kitchen. It hangs to the left of a spatula and just below a frying pan.
Speaking of Wells Fargo, does anybody do a better job of showcasing their history as a part of their brand? We see too many companies and clients who don’t take advantage of great opportunities. We spent several days at F&M Bank in Hannibal , Missouri in the fall. It’s a great bank with great people, but we think they could do some great marketing and have a real identity with the whole Mark Twain thing. Everyone who read Tom Sawyer or Huck Finn thinks of Hannibal as representing our deepest roots as Americans, and if we were a marketing firm, we’d almost do this one for free.
While we’re on the subject, do you remember our writing about Cow Pasture Bank? What about Tomato Bank? Tomato’s an interesting name they could do a lot with, but the only time we saw them in the press recently was when they got a C&D last year. Of course, even getting a C&D isn’t much news anymore. Sort of like dog bites man.
A few years back we spent a day at Bank of Transylvania in Romania , home of who- else but Count Dracula himself. We wanted to suggest they play up that connection (“If you don’t pay your mortgage by the 15th, we’ll bite you on the neck!”) but they were too intense and serious. And what about Mason-McDuffie Mortgage? In one form or another, they’ve been making mortgages in the Bay Area since 1887. Isn’t that a natural for a marketing campaign? Maybe have pictures of a Mason-Mac office from a hundred years ago with the heading “We’ve stayed in business since 1887 for one reason: We care about our borrowers.” Something like that.
Hundreds of banks cut or eliminated their dividends last year, but two of them raised their dividends twice in 2009. They are 1st Source (SRCE) and Hudson City Bank (HCBK). If you’re research-oriented, you might follow these stocks in 2010 and see how they perform relative to the bank indexes. If you’re really research-oriented, you can see whether it’s ever permissible to use indexes instead of indices.
Another thing for those of you with two much time on your hands: Credit Suisse has a loan of $10 million against Hugh Hefner’ Playboy Mansion ( 10236 Charing Cross Rd., Los Angeles , CA 90024.) You could see if he’s current or not and maybe offer to buy the loan from Credit Suisse. We have clients who are highly liquid, and depending on the yield, it could be a good investment. As his new lender, maybe you could even get invited to some Playboy parties there.

A mystery of the universe we’ll never understand is why 20-somethng models find the 80-something Hefner so attractive.
We’ve written a few items we like so much we’re going to run them again. We’ll re-run the one on Bob Gibson soon, and the one below is pretty interesting as well.
Here’s Steve Dalkowski, the hardest throwing pitcher of all time. Dalkowski played 9 years in the minors in the 1950’s and 60’s. His fastball was around 106 mph, and his minor league coach (Earl Weaver) said he threw 110 mph. What kept him from the majors was a lack of control. In one game he struck out 24, but he also walked 18, hit four batters, and threw six wild pitches. He once threw a no hitter but lost it because he gave up 17 walks. In his nine year career, he averaged 13.8 strikeouts per game, better than pitchers like Randy Johnson or Nolan Ryan.

In 1957 Dalkowski averaged 18 strikeouts per game. The poor man won only one game, however, because he also averaged 21 walks and 5 wild pitches per nine innings. After his career was over, Dalkowski suffered from alcoholism, became a migrant worker, and today lives in a Connecticut home for people with alcohol-related dementia. He’s 72 years old now and attends the occasional minor league game. Maybe we should all go visit him.

We’d been mildly surprised that Comerica Bank hasn’t done any acquisitions of failed banks in Texas where they’re based, and then we saw that there just haven’t been many opportunities. In the past two years, there have been only 7 Texas banks that have failed that could have been acquisition candidates. This compares to 31 in California , 72 in Georgia , and 83 in Florida . Also, Comerica is a disciplined bank, and with such institutions, often the best deals are the ones you don’t do.
As if we didn’t have enough to worry about, the January, 2010 Bulletin of Atomic Scientists estimated that Russia has 4,650 active nuclear weapons. What concerns us is that 40% are deemed to be protected by inadequate security systems. The Journal also says that many of the storage facilities are patrolled by guards who haven’t been paid in months, making them highly susceptible to bribes. Scary.
We were just asked the difference between a business model and an operating model. A business model is what business you’re in or want to or should be in. An operating model addresses resources and capabilities you need to create value from that business. These are okay concepts, but you mostly see them used by consultants who don’t understand a business and resort to consultanese jargon,
Here’s how Mark McGwire will finally get into the Hall or Fame. The American people can be very forgiving, and the path to redemption goes like this: After disgracing one’s self, the person must (1) disappear for several years, (b) then go public with a deep felt apology, and (c) then engage in some sort of worthwhile activity that shows you’re now a better person. Think of Richard Nixon. He never quite apologized, but he did go into exile and ultimately came back as an elder statesman and eminence grise. In McGwire’s case, he pretty much vanished, made his apology, and will now work with younger players for the Cardinals. Over time, people will forgive him his embarrassing testimony before Congress, and as long as the photo below is kept out of print, they’ll forget the steroids. This is Mark and his bother Matt who’s obviously into steroids.

Although we’re not huge fans of plaid shorts, it’s quite obvious that Mark is a much better dresser than his kid brother.

It’s time for a new movie survey! Send in a list of your all time favorite cult movies, and we’ll run the ten most mentioned. As for what constitutes a cult movie, Justice Learned Hand once said “I can’t define a cult movie, but I know one when I see one.” Send in those nominations today!
We just read that there are 200 billion stars in our galaxy. Ok, all you science majors, how many galaxies are there?
Last week we started on some of the positive changes brought about by FNMA and Freddie Mac. Here’s one that’s kind of interesting, but in the late 70’s, FNMA and Freddie Mac had different loan applications. If you were a mortgage banker, it didn’t really matter since you weren’t allowed to sell to Freddie Mac anyway, but if you were an S&L (the S&L’s owned Freddie Mac then), you could sell to both Fannie or Freddie. However, it was quite difficult because you had to know in advance whether the loan would go to Fannie or Freddie so you could use the correct loan app. In about 1980-81 or so, Freddie Mac allowed mortgage companies to sell to them. Both companies eventually agreed on what we now know as the 1003, and having a nationally accepted loan app did make things hugely easier, and therefore, better for borrowers.
If you look at a list of all the banks with C&D Orders, there’s Americana Community Bank in Sleepy Eye, Minnesota . Someone with some marketing skills should be able to do something there, maybe change the name to Bank of Sleepy Eye. It would certainly be more memorable than Americana Community Bank.
The guys at Calculated Risk maintain a very good list of the banks under regulatory orders with links to each order. http://www.calculatedriskblog.com/2010/03/unofficial-problem-bank-list-at-641.html. We look at it pretty regularly.
Question: What American League team holds the record for the most consecutive wins? Answer: It wasn’t the Yankees, the Red Sox, the Orioles or Detroit . It was the Oakland A’s, winning 20 straight in August and September in 2002. They started the streak at 68-51 in third place, and when the streak ended, they were 88-51, in first place. We saw every one of their home games during the streak, and those 21 days were more exciting than anything else we’d ever seen or read about in 45 years of following baseball. Nothing came close or ever will again.
Another way FNMA made it easier for consumers was to dramatically speed up the process in 1981. That’s when they instituted delegated underwriting. Prior to this, you would process the loan and then mail it to FNMA and have them approve it. We’re not even certain that FedEx or UPS were around then! But you’d mail the file to Fannie and they’d have something like 30 days in which to approve or disapprove the loan. Can you imagine?
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And when we wrote above that we just couldn’t see what those 20-something models saw in 80-something Hugh Hefner, we were just kidding. No need to write us on that one. Also, an interesting piece is attached on brokered deposits.

Garrett, Watts & Co.
Helping lenders increase revenues, control costs, and better manage risk.