The Garrett, Watts Report (It’s been snowing in the Bay Area!)

To Our Clients, Colleagues and Friends,  

• We think that the paperless office is clearly the future for mortgage banking, but for everyone doing it successfully, we see someone for whom it just doesn’t seem to help speed up the process. We’d love to hear of your real success stories out there. Or any real disappointments.
• A pretty high rating in the Dumb Bank Names Hall of Fame goes to a California bank with the improbable name Bank on It.  The stock in this small bank trades, under the symbol BKOT.
• The always curious Chris Brown analyzed the big banks last week, and here are the Texas Ratios for the five biggest.

Isn’t it interesting that the two banks that most investors are worried about, BofA and Citi, have the lowest (i.e. best) ratios?  For those new to this, a Texas Ratio of 36% means, at its most basic, that for every $100 of capital and loan loss reserves, the bank has $36 of bad loans. Bad loans are defined as non-accruals, REO, plus loans 30 days or more delinquent.  We prefer using 90 days and would settle for 60. A number over 100 is supposed to be a very good predictor of the bank failing. 

• When the Texas ratio gets too high, it’s also a predictor of the Bank’s obvious need to raise new capital.  From the bank’s perspective, it’s a simple issue:  Do they raise capital and stay alive, or do they not raise capital and fail.  From the shareholders perspective, the possibilities are (1) Does the bank not raise capital and fail, and (2) if it does raise capital, does the bank survive but with my interest as a shareholder being wiped out.   This refers to highly dilutive capital raises, and we’d love to see the dilution numbers for the typical deal the past year or so. Temecula Valley Bank almost did a deal to raise new capital which would have saved the bank. Unfortunately for the shareholders, it would have been 95% dilutive. Deals like this remind us of the line uttered during the Vietnam War, that ‘We had to destroy the village to save it.”
• Hey, we have an idea. An analyst at Oppenheimer was the guy during the S&L crisis twenty years ago who coined the term Texas Ratio, so we’ll claim authorship of a new phrase, the Vietnam Strategy.  This will refer to a strategy of raising dilutive capital that saves the bank but destroys the shareholders.  If you’re at a Board meeting and your investment banker tells you “We have good news…. we can raise capital for you”, ask him about the bad news.  Ask him if it involves a Vietnam Strategy.
• We just re-read Upton Sinclair’s The Jungle, the story of a Lithuanian immigrant family that comes to America and goes through truly horrible struggles. The most devastating mistake was the decision to use all their money for the down payment on a house that was way beyond their means. All the nightmares that follow start with the father losing his house to the bank.  The book was published in 1906, but it sure seems relevant to 2009.
  To fellow libertarians, now that you’ve read Atlas Shrugged, please read The Jungle. It will convince you that Ayn Rand’s cold-hearted philosophy needs to be tempered with a good dose of compassion. 

• Be careful about the clichés you use. What if you have a Texas Ratio of 200%, a C&D and a Prompt Corrective Action letter, but you tell your Board that you’ll be okay, that  “No way the FDIC seizes the bank.  That’ll happen the day it snows in San Francisco ” knowing that it never snows here.  Um, a few days ago it snowed throughout the San Francisco Bay Area.

• Kevin Tam answered our question about General Motors, noting that GM’s market capitalization, which was once more than $40 billion, is now about $372 million. He  contrasts that to Peet’s Coffee with a market cap of $400 million.  GM once epitomized the industrial might of America .  Have Starbucks and Peet’s now replaced the once iconic GM as epitomes of American business?
• Is the demise of General Motors as an American icon a sad thing, or is it just a reflection of the times? In terms of symbolizing America and our great strengths, wouldn’t we prefer that the world see Microsoft, Apple, and even Google as symbols of American business rather than an auto maker?

• Remember our mentioning the song “Get an ugly girl to marry you”?  A very senior officer at a multi-billion dollar bank (we’re not naming names) sent in the second line, completing the opening “If you want to be happy for the rest of your life, never make a pretty woman your wife, so for my personal point of view, get an ugly girl to marry you.”  This song was truly a phenomenon at parties. Everyone would sing along loudly, but when it came to the last part – “Get an ugly girl to marry you” – people would stop dancing, look up at the ceiling, and shout those last words at the top of their lungs.  They’d then laugh hysterically, as if it were the first time they’d heard the song.
• Good news:  A secondary marketing person wrote us that they sang the “Ugly Woman Song” at parties when she was in college around 8-9 years ago. It still lives!  Long after you’ve graduated from college and completely forgotten the point of Beowulf, you’ll still remember that song, and isn’t that precisely what college is all about?  And speaking of Beowulf,  wasn’t that about the worst book you ever read?  Even the Cliff Notes were incomprehensible.
• In a few weeks it will be 2010, so let’s look back fifty years to 1960. Financial historian Barbara Campbell tells us that the total national debt was $286 billion, a first class stamp was $.04, a gallon of gas was $0.25, a brand new Chevrolet was $2,600, and the average salary was $4,743.  The nostalgia for that decade implies that it was the best time imaginable, which like most generalizations, is only partly true.
• So before we get too nostalgic for the 60’s, remember that 55,000 American boys were killed in Vietnam, 10,000 Soviet missiles were aimed at us, blacks couldn’t vote, eat in most restaurants, or sleep in a hotel in the South, tens of millions of Americans lived in crushing poverty, and woman couldn’t get hired for most jobs other than as secretaries and teachers. If a woman got pregnant against her wishes, she had to go to back alley for an abortion, our air and water were horribly polluted, many men died of heart attacks in their 40’s and 50’s, and very few women survived breast cancer.  It was a fun decade in many ways, but it was also scarred with horrible assassinations, a draining war, and all the upheaval that accompanies change.
• We asked, tongue in check, what a Mojo was, and we got 30-35 responses, among them: “Mojo is when everything is working for you, and our Mojo has been working, with a 100% increase in volume this year.”  Or from a woman in Sacramento “I’ve always considered Mojo the same asswagger.”  And   “Mojo is a proper noun! You either have it or you don’t!”  From Kelly in Phoenix “It’s a presence.”  And from Illinois “Greenspan does not have it. Brett Favre does.”  Or this one ”It’s as simple as…. 20 kids in a room and you can clearly see who has Mojo and who does not!”  Here’s one that’s a good guess but is wrong “It’s the same as a Soul Patch.” Here’s another wrong answer:  “Jim Morrison sang about it in L.A. Woman when he sings “There’s a Mojo rising”.  Most likely, he was referring to the sun or moon.”   And about 20 people sent us the definition right from the dictionary.
• For your viewing pleasure, here are the bank holding companies with the biggest credit card portfolios.

What’s interesting is how quickly the numbers drop off.  The 15^th biggest is Popular Bank with $1.1 billion, #21 is Bank of the West at $385 million, and #29 is First Horizon at $151 million.  These are all from the December 1 issue of American Banker.

• And how about Richmond , California ’s Mechanics Bank?  These guys just don’t believe in stock splits, so one share is $11,000.
• Next time you see the Salvation Army people, why not slip $5 into the pot instead of a quarter. It’s a good organization doing good things. And next time a homeless person outside the supermarket asks for spare change, why not take him inside with you and buy him some food?

Garrett, Watts & Co.   special article:  How to Use Return on Capital to Determine ProfitiablityHelping mortgage lenders increase revenues, control costs, and better manage risk.

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