The Garrett, Watts Report (Dec. 7, 2009)

To Our Clients, Colleagues and Friends,

· During the crazy times, everyone used to get Lucites when a deal was done. No more. Coffee mugs with the banks name and logo are the thing now, and we actually like collecting them from clients. A white mug with your name and logo stands out the most. We have some from bank mugs which are dark, and no matter what the color of the lettering, it just doesn’t stand out. Keep this is mind next time you place an order.

· New York Community Bank took over Amtrust (i.e. the old Ohio Savings Bank), and we’ve always been intrigued by the former’s lending strategy. Almost all their lending is first lien mortgages against New York City apartment buildings that are rent controlled. Their theory is that if a building is rent controlled, its rents are low enough to make certain the building is always fully occupied. And if the loan has a good DSC ratio to start with, full ongoing occupancy makes that loan good as gold.
Why did they want Amtrust when they’re almost totally focused on New York City ? Well, they got $4 billion in cash, zero construction loans, zero non-performing loans, plus $4 billion in ultra cheap money market deposits. We know some good people at Amtrust, and we hope things work out for them.

· There’s no question that there are many banks that need to be shut down, but there are also banks being forced into failure by overly harsh regulatory orders. Some banks being seized might survive if only management were given time to work through their problems. Not many, but some! Rather than being overly punitive on banks now, shouldn’t they have done that a few years ago when real estate lending got out of hand? You don’t take the punch bowl away after everyone’s passed out or tossing their cookies, you do it before the party gets too wild.
Regulators should have been tougher a few years ago, and for those who’ve proven their past ability to work through problems, they should loosen up a little bit now. Consent Orders can make it difficult or impossible to turn a bank around, and aren’t there some banks where you want to make it easier and not harder for them to succeed?

· An experiment was done with Cal ’s library program to lend framed art for undergraduates to hang in their dorm rooms. One group was told that they could exchange any print they weren’t happy with, with unlimited exchange rights. The other group was told that there were no returns at all, and whatever they chose, they had to keep all semester. At the end, both groups were surveyed as to their satisfaction with the program. Which group do you think liked it better? In a bit of a surprise, the ones given no choice were much, much happier with the program.
We think about this experiment from time to time when we look at various programs offered by banks. When Garrett, Watts opened its first checking account way back when, we were offered an endless number of account types, with every combination and permutation of fees, number of checks permitted and so on. We remember asking, “Don’t you have just a basic business checking account?” People seem to want multiple choices in supermarkets and when dating, but this may not be the case with bank offerings.

· In 1979 General Motors had over 618,000 employees. Today it’s about 75,000, for a 87.9% shrinkage in the workforce. Can someone look up GM’s market cap at its peak versus what it is today? It would be fascinating in a sort of morbid way.

· Thirty years ago, GM had a 50% market share of all auto sales in the U.S. Today it’s struggling to stay at 20%. If you’re in a bookstore (remember those?), there’s a bazillion books on how to succeed in business without really trying. But there are very, very few books that study the colossal failures. We consciously don’t read books like The One Minute Manager or the ridiculous Who Moved My Cheese, but we might read a book that explores the commonalities among companies that fail.

· Freddie Mac demanded re-purchases of $2.7 billion of single-family mortgages to lenders for the first nine months of the year, and our clients are getting more and more of those scary re-purchase letters! The past year or so, we hear that when FNMA takes back a property, they make the seller of the loan repurchase it in about 25% of the cases.

· Just because you don’t sell to FNMA, you don’t get to ignore the buybacks mentioned above. If you sell to Chase, BofA, Wells, or Citi,they sell your loans to FNMA, and if they have to buy them back from FNMA, they’re going to make you buy them back from them, or at least make them whole. But you already knew that.

Remember how banks getting TARP money had to pay pretty rich dividends and grant the government warrants? Capitol One just paid back $3.5 billion of TARP money, including a 5% dividend, and the government sold the attached warrants for a profit of $146 million. The profit on the warrants + the dividends means a total profit to the U.S. taxpayer in excess of $200 million. Leave it to an ex-Goldman chief, Hank Paulson, to come up with a program that saved the banking system and generated a profit for the taxpayers.
Remember Billy Joel cheating on his wife, the model Christie Brinkley? And now Tiger Woods is cheating on his wife? These are two of the most beautiful women in the world, and it reminds us of a song that would get played very late at night at college parties with the improbable title “If you want to be happy for the rest of your life, go an’ make an ugly woman your wife.” It was kind of like Louie, Louie. No one would every buy the record to just sit around and listen to it, but no party was complete without it. Even people who never danced would jump up and dance so they could join everyone else in drunkenly shouting out the lyrics.
From Fred Jackson: “The late Edmund Safra told my class, when we were trainees at Republic National Bank of New York , Manage the costs of your liabilities, and good-yielding assets are simple to find.” Amen to that, Fred. What a great lesson, and probably weird-sounding to mortgage people who think earnings are asset driven. We’ve known hugely successful banks with loans-to-deposit ratios well under 60%. Commerce Bank back in New Jersey used to be an amazing money maker, and they typically ran about 30-35%. And the market understands this. For the fifteen years before the bank got sold to Toronto-Dominion Bank, its stock way outperformed Microsoft and all those other sexy tech stocks.
And one last thing. We were recently talking about someone who’s been out of the business for 2-3 years and we said that he’d lost his Mojo. We pretty much know how to use the word Mojo in a sentence, but do any of you know exactly what the heck a Mojo actually is? It’s obviously a noun, but is it a formal noun that you capitalize, or do you just use lower case? Muddy Waters sang “Got my Mojo working…. I’m gonna use it on you.” Kind of sounds sexual, but if you say that Allan Greenspan has lost his Mojo, it has about zero sexual connotations. Maybe negative sexual connotations. Can you say that Hillary Clinton has lost her Mojo, or can only men lose it? Anyway, we know some of you out there can help answer the burning question, “Just what the heck is a Mojo?”

Do you care about your community and do you buy a lot online? Totally unrelated, right? Wrong! In the typical city, of every $100 spent in independent stores, $68 returns to the community through payroll taxes, sales taxes and other expenditures. If you spend it at a national chain store located in your city, only $43 will stay in your town. And if you spend it online, $0 comes back. Happy Christmas shopping.

Can you believe it’s only three weeks or so till Christmas? Oy vey!

Garrett, Watts & Co.

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