The Garrett, Watts Report (March 19, 2010)

To Our Clients, Colleagues and Friends,

• With Congress trying to figure out what to with Regulatory bodies, we have an idea.  Instead of the OCC, OTS, FDIC, and Federal Reserve, we’d set things up like this:   (a) One regulator for banks over $50 billion in assets, (b) another for banks $1 billion to $50 billion in size, and (c) one for all banks under $1 billion in size. Why should the OCC regulate $2 trillion BofA along with a $50 million community bank that just happens to have a national bank charter?  Size should be the determinant of who regulates which bank, not the charter they have.
• A recent Wall Street Journal showed just how much cash the big technology companies had on December 31, 2009.

These tech companies have been using their cash on acquisitions and to develop new products.  Mortgage bankers increased their liquidity in big ways last year, but we see very little of that cash being used on acquisitions.

• We finally got an appropriate logo up on top.  On of these days we’ll figure out how to make it less blurry.
• We have a Beverly Hills client looking for someone to run their Rate Lock Desk. The main requirement besides experience is to have one of those personalities that’s really obsessive about the accuracy and integrity of all the data within the pipeline. After lunch and after the market closes, you can hang out on Rodeo Drive . Maybe you can meet Lindsay Lohan while shopping.
  
  Even if you don’t apply for the job, you should rent Down and Out in Beverly Hills .  It’s one of the funniest movies ever made.  Here’s a short clip.
• If you use a Hedging Advisor, we have a new job title in lieu of Head of Secondary Marketing or VP Capital Markets.  After all, your Hedging Advisor is really doing the Capital Markets stuff, so our idea for a more accurate title is Rate Lock Desk Manager and Pipeline Czar.  Below is Czar Nicholas, who was fired (and then shot) for allowing excessive leakage in the pipeline.
  
  
  

• Remember when baseball players were fiercely loyal to their team?  When he was 37, Jackie Robinson was traded by the Dodgers to the New York Giants, and he decided to retire rather than play for the arch-rival Giants.  And Maury Wills of the Dodgers once said that “One of the first things I learned as a Dodger is that I’m not supposed to like those guys, the Giants.  And as much as I respect Willie Mays, if his car was broken down on a Los Angeles freeway, I’d say, ‘Willie, I’m sorry, but you’ll have to call Triple-A”.  This is a photo of the great Jackie Robinson when he was in the minors, playing for the Dodgers affiliate in Canada .
  By the way, fraternizing with players from the opposition is still an offense that can lead to a player being fined by the Commissioner’s office.  It’s almost never enforced, however.
  

• If you’re thinking of cheating on your taxes, think twice. We went through a Total Compliance Audit on our 1981 returns, and one small example of how deep the IRS can dig had to do with a 4-plex we owned. We had expensed some patching done on the leaky roof, and the IRS agent got a ladder and literally climbed up on the roof to see if it really had been patched.  In a real audit, the receipts aren’t enough.  They wanted to look at the roof with their own eyes.  If they want to get you, they will.

• We’re reading Paul Johnson’s massive and dense History of Christianity, and the early days of the Church are quite fascinating. We’re also re-reading a biography of Woodrow Wilson, probably the first psycho-history ever written.  Who wrote it?  None other than Sigmund Freud himself.
  
• We see way too many audited financial statements where all revenue is dumped into one category of loan origination fee or some variation but where that includes loans fees, administrative fees, SRP’s and gain-on-sale. When we suggest to clients that they break it down and show these individual categories, we usually hear “That’s how our auditors do it” People, these are your financials, and it’s your choice what you choose to present.  Your auditor’s role is to audit the numbers.  Given that your major audience is your investors and/or warehouse lenders, we’d think you want to show them more detail on how you generate revenue, not less.
• We always knew this about how to present financials, but we wanted to double check, so we asked CPA Jeff Spiegel who confirmed it. No one knows the mortgage industry like Jeff, and if we were in the business, we’d choose his firms as our auditors.  You can reach him at 925-977-4000.
• What’s your ratio of Account Execs + loan officers to full-time employees? If you read page six of Flagstar’s latest prospectus, they have 3,411 full-time equivalent employees and 336 AE’s and LO’s for a 10.1-to-1 ratio.  It’s probably not a meaningful metric to compare yourself to unless you’re in the servicing business like Flagstar, but we find all ratios to be of interest. By the way, Flagstar’s prospectus is for their new capital raise of $250 million.
• On each of the two Boards of Directors of banks where’ve been CEO, we instituted a policy of no loans to insiders.  No as in zero! Aside from conflict issues, it’s just makes life easier at Safety & Soundness Exam time. Anyway,American Banker had an interesting article that showed insider lending off 99.5% at the BofA, off 95.1% at Wells, and off 68.8% at Citi. A tip of the hat to these three banks.
• We think very highly of Flagstar’s people and believe, absolutely, that they’re a survivor, but their last three years have been really tough.  Losses were $39 million in 2007, $275 million in 2008. and $513 million in 2009. The Board has adopted a five-part strategy to return the bank to profitability, and we completely agree with the focus and goals of this strategy.
• Here’s an idea to get people in Congress to work together instead of always demonizing the other side: Get some Foundation to give out ten awards of $1 million each year to the ten members of Congress who are the most bi-partisan and able to work with the other side.   It just might motivate the members of Congress, greedy little buggers that they are
• Would you invest in a company laden with huge amounts of debt and moderate growth or a company with high growth and no debt?  What if the choice were between countries with those profiles, one with tons of debt and one with no debt.  You’re given a choice to (a) put all your money into 10-year U.S. Treasuries or (b) 10-year Chinese government bonds.  Which would you invest in? The mere fact that you probably paused for a few seconds says a lot about our economies and its interrelatedness to the out-of-control federal deficit.
• Fiscal irresponsibility abounds not just at the federal level but at the state level as well. The Illinois Pension Fund is only 54% funded with a deficit of $54 billion. Considering how crappy things are in California , it’s a surprise that that State Pension fund is 87% funded.  A stunning 46 states are underfunded, but Washington State and Wisconsin are fully funded and Florida and New York are slightly over funded.
• San Francisco’s Mayor Gavin Newsom warned the labor unions that they needed to agree to pay cuts to deal with a large deficit. When they refused to negotiate and demanded pay raises, the Mayor exercised his legal authority and sent layoff notices to 17,000 city workers. Those who get re-hired will automatically be given a 6.25% pay cut.
  

• We asked all you over-50’s to send in your nominations for best albums, and we were flooded with great memories.  To get on the final list you needed at least two nominations.  Number one was Pink Floyd’s Dark Side of the Moon with 13 votes, followed by Let It Be, the White Album and Abbey Road by the Beatles with 7 votes each. We voted for albums by Leonard Cohen, Elvis and Country and the Fish.  All told, well over 60 people responded.

No Four Seasons or Beach Boys? No Grateful Dead or Country Joe, and how could this be a complete list with out the sweetness of Sam Cooke?  We were surprised at few voted were received by Credence Clearwater, Neil Young and Fred Neil, the Velvet Underground, the Ramones and Bruce Springsteen. You’d need a list three times longer to remember all the albums, and each one has its memories.

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Here’s Branch Rickey, the Dodgers General Manager who signed Jackie Robinson.  “A baseball box score is a democratic thing. It doesn’t tell how big you are, what church you attend, what color you are, or how your father voted in the last election.  It just tells what kind what baseball player you were on that particular day.”

We’ve attached an article on a client we advised on buying a bank, and he’s now bought his second bank.  Congratulations to mortgage banker Rob Hirt owner of RPM Mortgage.

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] )