The Garrett, Watts Report (March 15, 2010)

March 15, 2010

To Our Clients, Colleagues and Friends,

We have a client in the Columbus , Ohio area looking for someone to head up their Secondary Marketing Department. Expertise and experience in pipeline management, in making certain the data is accurate, is more important than the ability to be the world’s greatest expert on where interest rates are headed.  This photo shows a bit of what a great city Columbus is.  We’ve only been there in the winter, but we can easily imagine how pretty it must be in Spring and Summer.

• Investors tend to look at Price-to-Earnings ratios on big banks and Price-to-Book ratios on small banks. If we look at Price-to-Book ratios for the big banks, we find that many are trading below book value, obviously a reflection of investors’ distrust of what the book value really is when you apply serious mark-to-mark on loans. Anyway, here’s the ratio for a few of them.

The higher number for U.S. Bank is clearly a vote of investor confidence. By the way, there are tons of community banks whose stocks trade at big discounts to book, and many of these will be 10-baggers for investors with patience and strong stomachs.

• High school senior Hannah Garrett applied for a summer job as a horseback riding instructor at a summer camp, and the application specified that they wouldn’t hire anyone with tattoos, adding that any camp counselors who got tattoos during the summer would be fired. Yippee.  We still don’t like tattoos on women, and maybe there’d be fewer of them if more employers took this stand.

• This past Saturday would have been Kirby Puckett’s 50th birthday. Kirby has to be on anyone’s All Star list for a combination of sheer talent and joyful love of the game. When he signed for $7 million in 1997, he said he loved playing baseball so much that if they hadn’t offered him a contract, he’d play for free.   He had a lifetime batting average of .318, played every single game of his career for the Twins, and averaged 603 bats per season.  He won six Golden Glove Awards and was an All-Star ten times. What we remember most was watching him leap over the fence to rob A’s hitters of sure-thing home runs.  He was only 5-7 but he jumped like he was 6-7.  His eyesight went bad and he was out of baseball at 35 and dead at 46. Wherever you are, Kirby, we sure loved watching you play.

With all due respect to Killebrew, Hrebek, Carew, and Viola, Kirby was the greatest Twin of them all.

• We periodically tell friends about the near-perfect food, Spam. We think the company that makes it is even better.  Hormel (HREL) had revenues of $6.5 billion last year, raised their dividend for the 44^th consecutive year, and if you look at their stock for the past five years, it’s up 32%  v. the S&P 500 which, as we write this, is down about a half a point.
• By the way, Twinkies is another of nature’s perfect foods, but how the heck do you invest in them?  Any information would be welcome.
• It seems baseball managers are always saying of their star pitchers “He’s a real stud, and we know we can always get seven innings from him.” Seven innings? In 1933 New York Giant Carl Hubbell threw an 18-inning shutout.  Who the heck came up with the idea of taking pitchers out after 110-120 pitches?  Pitchers did just fine before the creation of the “pitch count.”
  
• Isn’t it almost a cliché that when people become really wealthy, they want to tear down their already-big house and build an even bigger one? In an interesting twist, Steve Jobs has a house near Silicon Valley with 14 bedrooms and 13-1/2 bathrooms. and he just got permission from the authorities to tear it down and build a much smaller one!
   

· When Hank Paulson and Tim Geithner engineered those huge loans to AIG, well over $100 billion, lots of people thought it was throwing good money down the toilet and that it would never be repaid. From the sale of one of its insurance units to MetLife for $15 billion, along with other moves, AIG will shortly be paying back $50.7 billion to the government.  Governments should never pick winners or losers, so we hate the idea of bailouts, but this one looks like it will turn out okay.

· The latest issue of Business Week has a great article by the fellow who told the SEC early on that Bernie Madoff was running a Ponzi scheme. You’ll be surprised to see how Madoff’s feeder-funds in Europe thought he was getting such good returns.  What’s interesting is how most of these feeder funds knew he was doing something illegal (they thought he was front-running, not doing a Ponzi) but looked the other way as long as they benefited.  Seriously, take a few minutes to read it. 

• One of the most fun events every year is Gary Findley ’s annual dinner for bank CEO’s.  Gary ’s taking a break this year, but we look forward to attending in 2011. Great food, great wine, great cigars, and it’s pretty stunning to sit there in one room with 50 or so presidents of community banks.  His law firm’s community bank client list is lengthy, and his clients extraordinarily loyal.
• There are still 460 banks left with Texas ratios greater than 100%.  We think we’re at the point where the number has stopped increasing and will now start to drop, a clear sign that banks are successfully dealing with their credit problems.
• One of the banks that failed last week was Park Avenue Bank.  This Manhattan- based bank had a Texas Ratio of a whopping 447%.  Holy mother of God!
  
• If you’re patriotic and you like steak, you’d want to know the butcher who carved this cut of meat.  You could call it the United Steaks of America.
  
  We’re very proud to have done work for Farmers Bank & Trust in Overland Park , Kansas , and we offer them this photo for them to use in their newsletter to bank customers.
  
• We have a mortgage banking client we advised on buying a bank in 2009. He came very close to buying one last year, was offered very attractive terms. We looked very closely at their Call Report, saw a rapid deterioration in loan performance, and argued as strongly as we could that he should not buy it. The bank just failed and we got a very nice note from him thanking us.  Sometimes the best deals are the ones you don’t do.
• We have a Phoenix client looking for a closing manager/supervisor, one very strong on compliance.  If you know someone, let us know
  
• We just read about the food shortages in Venezuela , and isn’t it predictable that command economies never work?  Fascist dictator Hugo Chavez wants to turn the country into the utopia and workers paradise that Cuba is, so the government has seized six million acres of farms and ranches as well as several big supermarket chains.  Don’t these people know their history?  Stalin failed when he collectivized the farms, as has every other economy based on state ownership of production.  Beef production has fallen 38% and soldiers are stationed in grocery stores when food arrives to keep order in the midst of massive shortages.
  
  We hope the people of Venezuela do to Chavez what the Italians finally did to    Mussolini.
  
• The Special Examiner has completed his report on the Lehman failure, and its 2,200 pages are a damning indictment of management deceit and Board cluelessness. Equally complicit is Lehman’s auditor Ernst & Young, which never raised questions about the financial and accounting shenanigans going on.  As Alan Abelson wrote, it turns out that the accounting firms are not always accountable.  Here’s the whole report.  We’re hard-copy kind of guys, but we did skim parts of it. If you don’t want to read the whole thing, there are some good newspaper stories on it.  By the way, this guy Anton Valukas who wrote the report deserves an A++.  We need more guys like him on the Boards of financial institutions, and maybe Obama should appoint him to head up the SEC.  And while we’re at it, someone should also appoint him to investigate what led to the failure of FNMA and Freddie Mac.

· One of these days, Congress will have to decide on the deposit size covered by FDIC incurrence, the former $100,000 or the current $250,000. Banks want the larger amount to more easily get bigger deposit accounts, but opponents talk about imposing some degree of moral hazard.  We’ve noticed in our travels that many European governments offer only a percentage of deposit insurance over a basic amount, and we’ve actually sat around thinking about this.  We wrote about this once before, and we came up with something like this:

You can quibble about the exact amounts to be insured, but you get the point.  We like is that this is the best of both worlds:  The banks can now attract largely -insured deposits up to $500,000, but we get to introduce moral hazard.  They’ll only get the big deposits if they’re safe and sound.
The best story to bolster our point is when we were sitting at a restaurant right next to super-bank executive Tony Frank.  His mom and dad were there with him, and the conversation we overheard (it was a very quiet night there) went like this:

“So mom, dad, where are you putting your money these days?”  His elderly mother said “Well, Tony, we know we should put it in your bank, but we’re getting wonderful rates on our CDs at Vernon Savings.”    “Mom, that’s horrible!    There was just a story in American Banker that laterally 98% of their loans had gone bad.” His wise mom answered with “Tony, I heard something like that, but we have about $40,000 there and it’s all FDIC insured, so what difference does it make.” We rest our case.

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Whether you like him or dislike him, President Obama might have a post-White House future as a stock market analyst.  On March 9^th last year, the markets bottomed out and took off for the races with great returns in all sectors.  What’s interesting is that on March 3, only six days before, Obama announced at a press conference that “…buying U.S. stocks is a good deal for long-term investors.”  On a different note, we’re running a contest (but without prizes) for your favorite 3-4 albums of all time.  But this one is only for people over 50!  We can’t wait to see what all of you send in!  We’re off to Florida and Utah this week, so send in those album nominations so we get them by Friday.

Cheers!
Garrett, Watts & Co.

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

• Mike McAuley   ([email protected] )
• Corky Watts      ([email protected]) 
• Joe Garrett      ([email protected] )